Cost of Capital and Profitability Analysis (A Case Study of Telecommunication Industry)

Abstract

Finance is the supply of funds, which regulates the activities and operations of the industry. Adequate finance is required besides the requirement of fixed and working capital for undertaking the program of extension, reorganization or expansion. Finance regulates the activities and operations of the industry. Adequate finance is required besides the requirement of fixed and working capital for undertaking the program of extension, reorganization or expansion. There are various source of raising funds. Since, now-a-days market is open, so both domestic and international market are available for procuring the funds. Finance is being raised through issue of shares, debenture, bond and retained earnings (internal source) from domestic as well as international capital market in the form of Global Deposit Receipts, American Deposit Receipts and Foreign Currency Convertible Bonds and from the wide range of financial institutions. However, the finance is not free of cost. The charge on each source capital is known as cost of capital. The cost of capital of any investment is the rate of return the suppliers of capital would expect to receive if the capital were invested elsewhere in an investment of comparable risk. The present study focuses on whether cost of capital has any relationship with financial performance of companies like capital structure. To know about the relationship between cost of capital and income generation capacity of a company, gross profit ratio is not sufficient. If cost of capital is not taken care properly, if it is more than returns, company can reach to crucial financial situation. So an effort has been made to measure impact of cost of capital on various financial factors i. e., profitability, growth rate, liquidity and dividend policy. The statistical like correlation and regression method have been applied. The study found that change of cost of capital affects the company’s profitability position. The higher cost of capital adversely affects the profitability position of the companies.

Keywords: Cost of Capital, Return, Growth Rate, Liquidity, Performance, Profitability

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