Companies Performance and Cost Of Capital:An Interrelationship Study Of Indian Companies

Finance is the lifeblood of the business. It is well known that finance is required besides the requirement of fixed and working capital for undertaking the program of extension, reorganization or expansion. Now a days market is open and finance is raised through issue of shares, debenture/bond from domestic as well as international capital market in the form of GDR (Global Deposit Receipts), ADR (American Deposit Receipts) and FCCB (Foreign Currency Convertible Bonds) and from the wide range of financial institutions. But, the finance is not free of cost. The suppliers of various sources of funds have a charge on the income of organization, like; dividend for shareholders, interest for bond/debenture holders; dividend /interest for non-banking financial companies, foreign investors and so on. This charge on each source capital is known as cost of capital. The present study focuses on whether cost of capital has any relationship with financial performance of companies like capital structure. For this purpose 151 top Indian companies on the basis of market capitalization 2007 have been selected and classified under different industrial groups. The statistical tools of ANOVA, correlation and multiple 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. Specially, Indian larger companies should necessary to give proper emphasize at the time of procuring the funds. Again the relationship between cost of capital and companies performance is not specific rather depends on nature of industry as different companies are regulating under different regulations.