Cost of Capital and Methods of Charging Interest

Introduction

In the course of running a business, capital items and funds are procured and invested in the business at a cost and for expected return. The cost includes both that of procurement and replacement. The purpose of this chapter is to bring to the investing farmer relevant discussions on the cost of capital and methods of charging interest rate. The chapter focuses on the costs associated with borrowing and the procedures for calculating interest charges. It also attempts to differentiate between cost of capital and cost of funds.

The rest of the chapter is organized as follows: Cost of Capital and its Calculation including Calculation of Debt, Cost of Equity including Calculation of Equity and Calculation of Weighted Cost of Debt, Cost of Funds, Interest Rate, Computation of Interest Rate, Simple Interest Rate, Compound Interest, Interest Rate and Agricultural Productivity in Nigeria. The chapter concludes with recommendations.

Discussions in this chapter benefitted from the ideas obtained from such sources as the following:

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  http://www.investopedia.com/terms/i/interestexpense.asp#ixzz3vgm16PHW ,

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  http://www.investopedia.com/terms/c/costoffunds.asp#ixzz3qDRrGJ63 ,

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  http://www.investopedia.com/terms/i/interestrate.asp#ixzz3qDVApaRQ ,

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  http://www.investopedia.com/terms/c/costofequity.asp#ixzz3qDXJNFDK ,

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  http://www.investopedia.com/terms/r/rateofreturn.asp#ixzz3qDdJJlBn ,

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  http://www.investopedia.com/terms/c/costofdebt.asp#ixzz3qDe2EyYv ,

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  https://www.investopedia.com/terms/w/wacc.asp#ixzz3tdarmPdM