From this topic pls explain, In financial management, the cost of capital is used primarily to make decisions that involve raising new capital.The most relevant component costs are today's marginal costs rather than historicalcosts. Should you use the nominal cost of debt or the effective annual cost? Explain.

Following are the elements of cost of capital:

Cost of retained earnings: This is one of the major source of finance for companies if they want to go for diversification or expansion activities. These earnings are nothing but the remaining earnings that has been accumulated by the company over the previous years without distributing it to the shareholders or anyone else in the organization. The equity shareholders of the company are eligible to get share of these earnings. but if they are distributed by the company the company can use it for making any investments or any other purposes. these earnings play an important role in calculating the cost of equity capital.

Cost of equity capital: These funds are raised from the company's equity shareholders. The equity shareholders are the owners of the company. Hence these funds need not be repaid to them. These funds are therefore in permanent in nature. The main objective of any organization is to satisfy their equity shareholders. If the performance of the company is doing good the equity shareholders get good share of the profits in the form of dividends. Similarly at the time of winding up the equity shareholders are the losers because they may not get back the investment made by them. The cost of equity is nothing but the minimum return that a company on its equity share capital.

Cost of preferred capital: This is nothing but the return that is earned on preference capital of the organization in order to make the earnings available to the equity shareholders.

Cost of debt: The next element of the cost of capital is the cost of debt. Debt can be in the form of debentures, bonds, term loans etc. The interest on debt is a fixed amount which needs to be borne by the company irrespective of its profit earning capacity. As the coupon rate is fixed the earnings of the company would increase through debt financing. Dividend paid to the shareholders is considered to be profit appropriation whereas interest on debt is a charge against profits. Hence this would reduce the company profitability & also reduce its tax liability.

Different companies have different cost of capital. The cost of capital for each company varies because of various factors like the market opportunities available for that particular company, environmental factors that impact the company in which it is operating like inflation, deflation, recession etc., factors like risk, preferences of the person who is providing the capital etc. these are various factors that impact a particular organization. Hence the cost of capital always varies from company to company.