What Is a Cost of Funds Index?

The cost-of-funds ratio is the percentage of expenses that need to be paid to use funds per unit of time. The cost rate of funds can be divided into a single source cost rate of funds and a comprehensive cost rate of funds. The cost ratio of individual funds refers to the percentage of expenses paid for a certain source of funds to the source of funds, such as the cost of borrowed funds, the common stock cost, the preferred stock cost, and the retained profit cost. The comprehensive cost-of-funds rate is a cost-of-funds rate calculated on the basis of a weighted average method based on the cost of each individual fund. The cost-of-funds ratio is an important indicator of the calculations and analysis required by an enterprise to raise funds and make investment decisions. ^[1]

Cost of capital

The cost of capital ratio should be as defined

(1) Capital cost ratio = capital occupancy fee / net fundraising = capital occupancy fee / [total fundraising × (1-fundraising fee rate)]

(2) Long-term loan capital cost rate = borrowing amount × borrowing interest rate × (1-income tax rate) / net borrowing (the borrowing amount is net borrowing after deducting the handling fee)

(3) Bond capital cost rate = (bond face value × coupon rate) × (1-income tax rate) / [bond issuance price × (1-bond financing rate)]

(4) There are several formulas for calculating the cost ratio of common stock funds:

Commonly used: risk-free interest rate + beta coefficient × (market return rate-risk-free interest rate)

If the dividends are fixed, then: the cost ratio of common stock capital funds = fixed dividends per year / [common stock issue price × (1-common stock financing rate)]

If the dividend growth rate is fixed, the cost ratio of common stock equity funds = the expected dividend for the first year / [common stock issue price × (1-common stock financing rate)] + fixed dividend growth rate

(5) The cost rate of funds for retained earnings is basically the same as the formula for calculating the cost rate of funds for common stocks, but it is not necessary to consider the funding rate.