Physics Wallah is an Indian edtech platform that provides accessible & comprehensive learning experiences to students from Class 6th to postgraduate level. We also provide extensive NCERT solutions, sample paper, NEET, JEE Mains, BITSAT previous year papers & more such resources to students. Physics Wallah also caters to over 3.5 million registered students and over 78 lakh+ Youtube subscribers with 4.8 rating on its app.
We Stand Out because
We provide students with intensive courses with India’s qualified & experienced faculties & mentors. PW strives to make the learning experience comprehensive and accessible for students of all sections of society. We believe in empowering every single student who couldn't dream of a good career in engineering and medical field earlier.
Our Key Focus Areas
Physics Wallah's main focus is to make the learning experience as economical as possible for all students. With our affordable courses like Lakshya, Udaan and Arjuna and many others, we have been able to provide a platform for lakhs of aspirants. From providing Chemistry, Maths, Physics formula to giving e-books of eminent authors like RD Sharma, RS Aggarwal and Lakhmir Singh, PW focuses on every single student's need for preparation.
What Makes Us Different
Physics Wallah strives to develop a comprehensive pedagogical structure for students, where they get a state-of-the-art learning experience with study material and resources. Apart from catering students preparing for JEE Mains and NEET, PW also provides study material for each state board like Uttar Pradesh, Bihar, and others
What is the meaning of Cost of Capital in CA Inter Financial Management?
Cost of Capital is the minimum return a company needs to earn on its investments to cover the cost of raising funds through debt and equity.
What are the main types of Cost of Capital?
The two main types are Cost of Debt (interest paid on borrowings after tax) and Cost of Equity (return expected by shareholders).
What is the relationship between Cost of Capital and Leverage?
Leverage increases when a company borrows more. While debt may reduce the Cost of Capital initially due to tax benefits, too much borrowing increases risk and raises the overall cost.
Why is Weighted Average Cost of Capital (WACC) important for students?
WACC combines the cost of debt and equity in proportion. It is widely used in FM numerical questions to evaluate project feasibility and investment decisions.
CA Inter Cost of Capital and Leverage FM
Muskan Verma27 Aug, 2025
Share
CA Inter Cost of Capital: The concept of CA Inter Cost of Capital is one of the most important topics in Financial Management (FM). It explains how much money a company spends to raise funds from debt and equity. Understanding this helps businesses and students in FM numerical questions to know whether an investment or project is worth taking up. A clear knowledge of this topic builds a strong base for students preparing for exams.
What is the CA Inter Cost of Capital?
CA Inter Cost of Capital means the cost a company pays to get money for its business. Companies can get money by borrowing (debt) or by selling shares (equity). The cost of borrowing is called the cost of debt, and the cost of selling shares is called the cost of equity. Both together give us the total CA Inter Cost of Capital.
This cost helps the company know the minimum return they need from their projects. If a project cannot earn more than this cost, the company may lose money. So, always remember, the project should earn more than the CA Inter Cost of Capital to be worth it.
Types of Cost of Capital
There are two main types of CA Inter Cost of Capital:
Cost of Debt: It is the interest that a company pays on loans or borrowings. Since interest is tax deductible, the actual cost is calculated after tax. Companies with strong credit ratings usually get loans at lower interest rates, reducing their cost of debt.
Cost of Equity: It is the return expected by shareholders. Unlike debt, it is not fixed and depends on market risk. Investors expect higher returns when risk is high. This makes the cost of equity more difficult to calculate.
Note: When these are combined in proportion, we get the Weighted Average Cost of Capital (WACC). WACC is a common formula in FM numerical questions. It shows the overall cost of capital when debt and equity are taken together.
What is Cost of Capital and Leverage?
Capital structure means the mix of money from debt and equity that a business uses. A good capital structure tries to balance between borrowing and shares to make sure the company is safe and can grow.
Leverage means how much money a company borrows to fund its business. It is usually shown by leverage ratios. These ratios help us see how much debt a company has compared to its equity. In Financial Management, there are three types:
Operating Leverage: It shows how fixed costs in operations affect profits. A company with high fixed costs has higher operating leverage. This means small changes in sales create big changes in profits.
Financial Leverage: It shows how debt affects profits available to shareholders. More debt means higher financial risk. If sales increase, profits to shareholders may rise fast, but if sales fall, losses may also increase.
Combined Leverage: It is a mix of operating and financial leverage. It shows the overall risk of the company. Combined leverage explains how both fixed operating costs and debt costs together affect earnings.
How Does CA Inter Cost of Capital Connect with Leverage?
Using more debt increases leverage because the company borrows more. Debt usually costs less because interest on debt is tax-deductible. But if a company uses too much debt, its risk goes up, and so does its CA Inter Cost of Capital. That's why companies try to find the best capital structure that keeps the CA Inter Cost of Capital low.
How Leverage Affects CA Inter Cost of Capital?
If the company borrows more, the debt part increases, and the cost might look cheaper at first. But if too much debt is used, risks increase. The company may have to pay higher interest rates, which increases the CA Inter Cost of Capital. High leverage can be dangerous for the company.
Importance of CA Inter Cost of Capital
Below, we’ve mentioned the why CA Inter Cost of Capital:
It helps companies decide which projects to choose.
It is used to calculate the hurdle rate, or minimum acceptable return.
It affects the value of the company. A higher CA Inter Cost of Capital means the company is riskier and can be valued less.
It influences financial decisions related to leverage and capital structure.
CA Inter Cost of Capital Calculation Example
Suppose a company has 60% equity and 40% debt. The cost of equity is 12%, and the after-tax cost of debt is 8%. To find the weighted cost of capital (or CA Inter Cost of Capital), use:
(0.6 × 12%) + (0.4 × 8%) = 7.2% + 3.2% = 10.4%
So, 10.4% is the CA Inter Cost of Capital. Any project the company picks should give returns of more than 10.4%.
The topic of CA Inter Cost of Capital and leverage is central in Financial Management. It explains how companies decide the right mix of debt and equity. It also shows how risk and return are connected. Students preparing for exams must practice FM numerical questions on these topics in detail. With regular practice and understanding of formulas, this chapter becomes easy to handle. The study of CA Inter Cost of Capital helps in real-life business as well, where financial decisions matter for growth, stability, and future expansion.
