4 Steps of capital Budgeting Process

 The cost of capital has 4 sources. They are discussed below:
Common Stock:
     The cost of common stock is the return, required on the stock by investors in the market price. Ordinary shareholders are entities to dividends after the income claims of other supplier of capital have been met. Thus they have residual ownership claim.

Preferred Stock:
     It represents a special type of ownership interest in the firm. It gives preferred stockholders the right to receive their stated dividends before any earnings can be distributed to common stockholders, because preferred stock is a form of ownership. The proceeds from its sale are expected to be held for an initiate period of time.

Debt:
     Cost of debt is the after tax cost of long term fund through borrowing. The calculation of the cost of fund raised through debt in the form of debenture. To apply the formulation of explicit cost of debt, we need data regarding –
a)The net cash proceed/ inflows the issue price of debenture amount of loan minus all flotation cost from specific source of debt. Net cash proceeds are the funds actually received from the sale of security. Flotation cost is the total cost of issuing and selling securities.
b)The net cash outflow in terms of the amount of periodic interest payment and repayment of principal in installments or in lump sum on maturity.

Return earning:
     Determined earning as a source of finance for investment proposal differs from other sources like debt, preference share and equities. Cost of retained earnings is the same as the cost of an equivalent fully subscribe issue of additional shares which is measure by the cost of equity capital.