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Hello sir, in your example regarding multi period capital rationing, when it said that the cost of capital is 10%, does it not mean that 10% is the interest lost on money invested- if the money invested was the co.’s money as opposed to borrowed money? So if i were to not invest the whole of the 14000 at time 1 due to limited capital at time 2, could i not then invest this for that one year span at an interest rate of 10% instead of depositing only for 7% interest? That way i avoid the 3% loss.
I know i am stretching the question too far but it set off a flurry of thoughts in my head and couldnt move forward before clarifying.
You are always of great help. Havent been this interested in study material for a very long time. Thanks!10% is the cost of borrowing money and any cash held by the business is being borrowed – it is cash that belongs to shareholders.
There is no mention here of being able to deposit it at 10% – only at 7% – and therefore depositing it is losing money which is only sensible if it could later be invested better.
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