Capital Structure Interview Question:

Compare Component cost and Composite cost?

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The component cost is the one which comes under the cost of capital and it has three levels:-

(i) Return at zero risk level: which tells about the expected rate of return when there is no risk involved in the project

(ii) Premium for business risk: This tells about the variance in operating profit due to change in sales.

(iii) Premium for financial risk: This tells about the captital structure risk.

It is the decision whether to buy components or services from an outsider or not. It requires understanding the cost associated with building and buying the components.

Composite Capital is also called the weighted average of component cost of common stock, preference shares and debt. In this each of the components is given an importance on its interest rate, risk analysis and management loss of control which is used to compute the composite capital.
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