tag:blogger.com,1999:blog-9803545683655697772024-03-19T05:57:53.057-07:00Online Courses : The Management of CapitalThis course describes how to manage the capital and cost of an investment - Focus on how we manage capital within an organization.Unknownnoreply@blogger.comBlogger4125tag:blogger.com,1999:blog-980354568365569777.post-50845934506016700432008-09-22T09:52:00.000-07:002009-03-31T06:14:08.836-07:00Basic Concepts and Theories<h3 id="1">Introduction</h3> <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="how to manage the capital to make the best decision" /></sub> long-term investments we make today will determine<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>value of our business tomorrow. In order to make long-term investments in new product lines, new equipment and other assets, managers must know<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>cost of obtaining funds to acquire these assets. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="how to manage the capital to make the best decision" /></sub>cost associated with different sources of funds is called<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>cost of capital. Cost of Capital represents<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>rate a business must pay for each source of funds - debt, preferred stock, common stock, and retained earnings.<br /><br />Since we want to maintain existing market values, cost of capital is<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>minimum acceptable rate of return for long-term investments. If<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>business earns more than its cost of capital, the market value of<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>business will increase. Likewise, if returns on long-term investments are below the cost of capital, market values will decline. This leads us to a very fundamental objective within financial management - maximizing values for<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>owners of the business. Therefore, how we manage capital is extremely important to fulfilling the basic objective of increased shareholder value. <div style="text-align: right;"><br /></div> <h3 id="2">The Economics of Capital</h3> An understanding of economics and capital can also help us understand how we should manage capital within an organization. For example, <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>total amount of capital available is determined by the total amount of investment. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="how to manage the capital to make the best decision" /></sub>overall economy has a total capital equal to the sum of all capital goods (assets). Since these goods lose value over time, some level of reinvestment is needed to maintain<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>asset base at its current size. Additional investments will cause the capital stock of an economy to grow, similar to<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>assets of a business.<br /><br /><sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="how to manage the capital to make the best decision" /></sub>amount invested in the economy is determined by<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>after tax rate of return on capital. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="how to manage the capital to make the best decision" /></sub>actual level of investment depends on<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>willingness of people to invest in assets. People invest based on the returns they expect to receive. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="how to manage the capital to make the best decision" /></sub>returns to investors must be adjusted for inflation, taxes, depreciation, and risk related to<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>investment. It is the after tax real rate of return that drives investment.<br /><br />Overall, <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>after tax rate will remain constant over time due to changes in investment spending. For example, if<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>rate of return on capital were to increase, there will be an increase in investment spending. As the capital stock expands from increased investing, the rate of return on capital will drop back down. Conversely, when<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>rate of return on capital is low, there will be a decrease in investment. As capital shrinks, the rate of return on capital rises. Consequently, investment spending will keep rates of return on capital at stable levels.<br /><br />Taxation of capital will increase<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>cost of capital. In order to supply capital, investors must receive a minimum after tax real rate of return. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="how to manage the capital to make the best decision" /></sub>users of capital not only pay investors a nominal rate of return, but they also incur<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>cost of economic depreciation (lost values of capital assets) and related taxes on capital. These total costs represent<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>cost of capital. <div style="text-align: right;"><br /></div> <h3 id="3">Basic Considerations in Managing Capital</h3>Now that we understand<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>importance of capital, let's focus on how we manage capital within an organization. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="how to manage the capital to make the best decision" /></sub>overall objective is to find an "optimal" capital structure - the right mix of capital sources (debt and equity) that minimizes <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>overall cost of capital and maximizes values to the shareholders (owners of the business). When we raise capital, we have two choices - issue debt or issue stock. Debt is represented by bonds which are long-term instruments sold to investors. Stock is<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>ownership interest of the business and depending upon the rules of incorporation, stockholders will have certain rights. Therefore, we start our understanding of capital management by looking at<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>advantages and disadvantages of <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>two sources of capital:<br /><br />Some advantages to using stock are: <ul><li> No fixed payments are required to investors; dividends are paid only as earnings are available.</li><li> No maturity date on the security, <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>invested capital does not have to be repaid.</li><li> Improves the credit worthiness of the company.</li></ul> Some disadvantages to using stock are: <ul><li> Dilutes<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>earnings per share to shareholders.</li><li> Issuance costs are higher than debt.</li><li> Issuing more stock can increase the overall cost of capital.</li><li> Dividend payments to shareholders are not tax deductible.</li></ul> Some advantages to using debt are: <ul><li> Interest payments are tax deductible.</li><li> Does not dilute earnings per share or control within<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>company.</li><li> Cost is fixed; interest and principal do not change.</li><li> Expected returns to investors are usually lower than stock.</li></ul> Some disadvantages to using debt are: <ul><li> Fixed charges must be paid regardless of available earnings or cash flow.</li><li> Adds more risk to<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>business.</li><li> Has a maturity date and the capital invested must be repaid to investors.</li></ul>In addition to understanding<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>pros and cons of financial securities, we also need to recognize that several conditions will impact how we raise capital. These conditions include:<br /><br />Economic Conditions: <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="how to manage the capital to make the best decision" /></sub>demand and supply of capital in<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>marketplace can impact how capital is raised. For example, expectations of inflation will influence the cost that is paid for capital. Higher rates of inflation erode<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>values of investments and thus, investors will demand higher rates of return.<br /><br />Market Conditions: <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="how to manage the capital to make the best decision" /></sub>demand for higher rates of return will increase<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>cost of capital. For example, if we raise capital with a security that is not highly marketable, investors will require higher rates of return for<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>increased risk.<br /><br />Operating Conditions: <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="how to manage the capital to make the best decision" /></sub>level of fixed costs used to operate<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>business needs to be considered. For example, higher fixed costs can result in wider variations to operating income from numerous factors - increased competition, slower economic growth, etc. This is referred to as business risk.<br /><br />Financial Conditions: <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="how to manage the capital to make the best decision" /></sub>existing levels of outstanding debt will impact how capital will be raised. Higher levels of debt (including preferred stock) can result in wider variations to earnings due to higher fixed obligations that must be paid (interest to debt holders and fixed dividends to preferred stock holders). This is referred to as financial risk.<br /><br />Not only do we need to look at various conditions, but we need to consider how financing will impact capital structure. Capital structure appears on<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>right side of the Balance Sheet as liabilities and equity; i.e. the long-term sources of funds to finance assets. Assets appear on the left side of the Balance Sheet. Capital structure is<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>permanent financing of the business through the use debt and stock. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="how to manage the capital to make the best decision" /></sub>total of all liabilities and equity is referred to as Financial Structure. Therefore, Capital Structure = Financial Structure - Current Liabilities.<br /><br />Finding<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>right capital structure encompasses numerous considerations - growth rates in sales, risk attitudes of management, liquidity of assets, control position of<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>company, etc. Finding the right capital structure also involves finding the right amount of financial leverage. Financial leverage is<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>financing of assets with fixed obligations - debt and preferred stock. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="how to manage the capital to make the best decision" /></sub>use of financial leverage increases <a href="http://online--courses.blogspot.com/2008/09/return-on-equity-roe_22.html">return on equity</a> up to a certain level of operating income. As you use more financial leverage (debt and preferred stock), higher levels of operating income are needed to cover<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>additional fixed obligations (interest on debt and fixed dividends on preferred stock).<br /><br />Generally, <layer id="google-toolbar-hilite-88" style="background-color: Yellow; color: black;">the</layer> use of financial leverage will improve <a href="http://online--courses.blogspot.com/">financial performance</a> whenever returns are higher than<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>costs of obtaining funds. In a perfect world, management would favor more leverage whenever return on capital exceeds<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>after tax costs of debt. However, higher returns also result in higher risk to<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>business (risk return tradeoff). Therefore, <layer id="google-toolbar-hilite-92" style="background-color: Yellow; color: black;">the</layer> use of financial leverage is a balancing act between higher returns for shareholders vs. higher risk to shareholders.<br /><br />Financial leverage can be measured with ratios such as debt to total assets. Financial leverage is also expressed as<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>Degree of Financial Leverage or DFL. DFL is <layer id="google-toolbar-hilite-94" style="background-color: Yellow; color: black;">the</layer> percentage change in earnings given a change in operating income (Earnings Before Interest & Taxes or EBIT). <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="how to manage the capital to make the best decision" /></sub>higher <layer id="google-toolbar-hilite-96" style="background-color: Yellow; color: black;">the</layer> DFL, <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>riskier <layer id="google-toolbar-hilite-98" style="background-color: Yellow; color: black;">the</layer> business. We can use <layer id="google-toolbar-hilite-99" style="background-color: Yellow; color: black;">the</layer> following formula to calculate DFL:<br /><br />DFL = EBIT / EBIT - I - (P / (1-TR)) where I is Interest and P is Preferred Dividends and TR is <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>tax rate.<br /><br /><img src="http://coursgratuits.net/en/3/images/1.PNG" /><br /><br />In addition to financial leverage, there is operating leverage. Operating leverage is<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>use of fixed costs in production over variable costs. For example, replacing production workers (variable cost) with robots (fixed cost) would be an example of increased operating leverage. As operating leverage increases, more sales are needed to cover<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>increased fixed costs. Since variable costs have been reduced, profits will increase more given an increase in sales after <layer id="google-toolbar-hilite-103" style="background-color: Yellow; color: black;">the</layer> breakeven point has been reached. High levels of fixed costs increase business risk. Like financial leverage, we can measure<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>Degree of Operating Leverage (DOL) as <layer id="google-toolbar-hilite-105" style="background-color: Yellow; color: black;">the</layer> percentage change in operating income given a change in sales. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="how to manage the capital to make the best decision" /></sub>following formula can be used to calculate DOL:<br /><br />DOL = CM / CM - FC where CM is Contribution Margin and FC is Fixed Cost.<br /><br /><img src="http://coursgratuits.net/en/3/images/2.PNG" /><br /><br />Usually firms use one form of leverage over<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>other to finance investments. For example, manufacturing companies tend to invest heavily in fixed assets and thus operating leverage is used much more than financial leverage. Service type companies have low levels of investment in fixed assets and therefore, financial leverage is widely used to finance <layer id="google-toolbar-hilite-108" style="background-color: Yellow; color: black;">the</layer> business. Leverage is relative to<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>type of fixed cost approach that is appropriate for funding <layer id="google-toolbar-hilite-110" style="background-color: Yellow; color: black;">the</layer> business and leverage by its very definition creates risk. Therefore, <layer id="google-toolbar-hilite-111" style="background-color: Yellow; color: black;">the</layer> use of leverage will always include a tradeoff between risk and return. <div style="text-align: right;"><br /></div> <h3 id="4">Approaches to Managing Capital</h3>One way to understand how to manage capital is to look at<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>various approaches that can be used for finding <layer id="google-toolbar-hilite-113" style="background-color: Yellow; color: black;">the</layer> right capital structure. As we previously indicated, <layer id="google-toolbar-hilite-114" style="background-color: Yellow; color: black;">the</layer> right capital structure is that mix of debt and stock that maximizes <layer id="google-toolbar-hilite-115" style="background-color: Yellow; color: black;">the</layer> value of<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>firm while at <layer id="google-toolbar-hilite-117" style="background-color: Yellow; color: black;">the</layer> same time maintains a relatively low overall cost of capital. Two very different approaches to capital management are <layer id="google-toolbar-hilite-118" style="background-color: Yellow; color: black;">the</layer> Net Operating Income Approach and<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>Net Income Approach.<br /><br />Net Operating Income Approach: This approach to capital management concludes that it does not matter how you mix<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>capital structure. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="how to manage the capital to make the best decision" /></sub>value of <layer id="google-toolbar-hilite-122" style="background-color: Yellow; color: black;">the</layer> business is not determined by how you arrange <layer id="google-toolbar-hilite-123" style="background-color: Yellow; color: black;">the</layer> right side of <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>Balance Sheet. Additionally, <layer id="google-toolbar-hilite-125" style="background-color: Yellow; color: black;">the</layer> overall cost of capital will not change as you change<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>mix of capital. Therefore, values are determined by <layer id="google-toolbar-hilite-127" style="background-color: Yellow; color: black;">the</layer> capitalization of operating income or EBIT (Earnings Before Interest Taxes).<br /><br /><span class="quote">Example 3 - Calculate Market Value of Business under Net Operating Income Approach to Capital Management<br /><br />Norton Company has $ 400,000 in outstanding debt at 7% interest. Norton's cost of capital is 12% and expected operating income or Earnings Before Interest & Taxes (EBIT) is $ 120,000.<br /><br />Earnings to Shareholders = $ 120,000 - $ 28,000 (7% interest on debt) = $ 92,000.<br />Total Market Value = $ 120,000 / .12 = $ 1,000,000<br />Market Value of Stock = $ 1,000,000 - $ 400,000 = $ 600,000<br />Cost of Equity = $ 92,000 / $ 600,000 = 15.3%</span><br /><br />Net Income Approach: In contrast to<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>Net Operating Income Approach, <layer id="google-toolbar-hilite-129" style="background-color: Yellow; color: black;">the</layer> Net Income Approach concludes that <layer id="google-toolbar-hilite-130" style="background-color: Yellow; color: black;">the</layer> capital structure of an organization has a major influence on <layer id="google-toolbar-hilite-131" style="background-color: Yellow; color: black;">the</layer> value of <layer id="google-toolbar-hilite-132" style="background-color: Yellow; color: black;">the</layer> organization. Therefore, <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>use of leverage will change both <layer id="google-toolbar-hilite-134" style="background-color: Yellow; color: black;">the</layer> cost of capital and <layer id="google-toolbar-hilite-135" style="background-color: Yellow; color: black;">the</layer> value of <layer id="google-toolbar-hilite-136" style="background-color: Yellow; color: black;">the</layer> firm. Net Income is capitalized in arriving at<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>market value of <layer id="google-toolbar-hilite-138" style="background-color: Yellow; color: black;">the</layer> firm.<br /><br /><span class="quote">Example 4 - Calculate Market Value of Business under Net Income Approach to Capital Management Referring back to Example 3, we can calculate</span><sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub><span class="quote">following values:<br /><br />Market Value of Stock = $ 92,000 / 15.3% = $ 601,307<br />Total Value = $ 601,307 + $ 400,000 = $ 1,001,307<br />Overall Cost of Capital = $ 120,000 / $ 1,001,307 = 12%</span><br /><br />Franco Modigliani and Merton Miller have provided some guidance between<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>Net Operating Income Approach and <layer id="google-toolbar-hilite-141" style="background-color: Yellow; color: black;">the</layer> Net Income Approach. Modigliani and Miller concluded that capital structure is not a major factor in<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>determination of values. Values are determined by <layer id="google-toolbar-hilite-143" style="background-color: Yellow; color: black;">the</layer> investment and operating decisions that generate cash flows. It is cash flows that give rise to values. This approach to valuation has become a mainstay within financial management. But what about capital structures? Mike Jenson, founder of <layer id="google-toolbar-hilite-144" style="background-color: Yellow; color: black;">the</layer> Journal of Financial Economics, may have resolved<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>answer to this question. Jenson noted that whenever a company makes a change in its capital structure, it sends a signal to investors. This signaling effect does in fact result in changes to valuations. For example, when <layer id="google-toolbar-hilite-146" style="background-color: Yellow; color: black;">the</layer> Chairman of <layer id="google-toolbar-hilite-147" style="background-color: Yellow; color: black;">the</layer> Federal Reserve speaks about interest rates, a signal is sent to<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub><layer id="google-toolbar-hilite-148" style="background-color: Yellow; color: black;"></layer> marketplace and valuations quickly change. Therefore, shifts in capital structure do impact <layer id="google-toolbar-hilite-149" style="background-color: Yellow; color: black;">the</layer> value of a business.<br /><br />Jenson also noticed that managers have a tendency to guard capital and minimize<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub><layer id="google-toolbar-hilite-150" style="background-color: Yellow; color: black;"></layer> distribution of dividends to shareholders. This follows with <layer id="google-toolbar-hilite-151" style="background-color: Yellow; color: black;">the</layer> so-called "pecking order" of financing whereby managers prefer internal sources of capital to external sources of capital. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="how to manage the capital to make the best decision" /></sub>specific pecking order is as follows:<br /><br />1. Internal sources of capital - retained earnings / cash<br /><br />2. External sources of capital - debt<br /><br />3. External sources of capital - convertible securities<br /><br />4. External sources of capital - preferred stock<br /><br />5. External sources of capital - common stock<br /><br />Consequently, capital structures can impact valuations due to<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>so-called signaling effect. Additionally, <layer id="google-toolbar-hilite-154" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-86" style="background-color: Yellow; color: black;">the</layer></layer> real source of values will reside in cash flows (more specifically free cash flows). Free cash flows are <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>excess cash that can be withdrawn from a business after paying everything off. And in order to generate free cash flows, management must generate returns in excess of <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="concepts and theories to understand the management of capital" /></sub>cost of capital.Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-980354568365569777.post-74458187864986569682008-09-22T09:51:00.000-07:002009-03-31T06:30:39.274-07:00Calculating the Cost of CapitalIn order to evaluate projects of average risk, we must know<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="The cost of capital, management courses online " /></sub>overall cost of capital. Cost of Capital is calculated as<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="The cost of capital, management courses online " /></sub>weighted average of each component of capital - debt, common stock, preferred stock, and retained earnings. Each component is calculated as follows:<br /><br /><strong id="1">Cost of Debt (Cd)</strong>: Calculate <layer id="google-toolbar-hilite-2" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-0" style="background-color: Yellow; color: black;">the</layer></layer> after tax cost of debt based on<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="The cost of capital, management courses online " /></sub>effective interest rate. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="the management of capital, evaluating of projects" /></sub>following formula is used to calculate <layer id="google-toolbar-hilite-5" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-2" style="background-color: Yellow; color: black;">the</layer></layer> cost of debt:<br /><br />Cd = I ( 1 - TR) where I is Interest Rate on Debt and TR is<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="The cost of capital, management courses online " /></sub>Tax Rate.<br /><br /><span class="quote">Example 5 - Calculate <layer id="google-toolbar-hilite-7" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-3" style="background-color: Yellow; color: black;">the</layer></layer> Cost of Debt<br /><br />Cantor Corporation borrowed $ 100,000 at 8% interest. <layer id="google-toolbar-hilite-8" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-4" style="background-color: Yellow; color: black;"></layer></layer></span><sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="the management of capital, evaluating of projects" /></sub><span class="quote"><layer id="google-toolbar-hilite-8" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-4" style="background-color: Yellow; color: black;"></layer></layer>amount of</span><sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="The cost of capital, management courses online " /></sub><span class="quote">loan proceeds was $ 96,000 and <layer id="google-toolbar-hilite-10" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-5" style="background-color: Yellow; color: black;">the</layer></layer> tax rate is 35%.<br /><br />Cost of Debt = ($ 100,000 x .08) / $ 96,000 x ( 1 - .35) = 8.3% x .65 = 5.4%.</span><br /><br /><strong id="2">Cost of Common Stock (Ccs)</strong>: Three different methods can be used to calculate<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="The cost of capital, management courses online " /></sub>Cost of Common Stock. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="the management of capital, evaluating of projects" /></sub>three methods are:<br /><br />1. Dividend Growth - Dividends paid to common shareholders along with<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="The cost of capital, management courses online " /></sub>overall expected growth rate is used to calculate a cost for <layer id="google-toolbar-hilite-14" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-7" style="background-color: Yellow; color: black;">the</layer></layer> common stock. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="the management of capital, evaluating of projects" /></sub>formula for calculating <layer id="google-toolbar-hilite-16" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-9" style="background-color: Yellow; color: black;">the</layer></layer> cost of common stock is: (Dividends in Year 1 / Market Value of Stock) + Overall Growth Rate.<br /><br /><span class="quote">Example 6 - Calculate</span><sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="The cost of capital, management courses online " /></sub><span class="quote">Cost of Common Stock based on Dividend Growth<br /><br />Cantor Corporation expects to pay a $ 6.00 dividend this year to common shareholders. Historically, dividends have grown by 2% each year. Cantor's common stock is currently selling for $ 45.00 per share.<br /><br />Cost of Common Stock = ($ 6.00 / $ 45.00) + .02 = 15.3%.</span><br /><br />2. Capital Asset Pricing Model (CAPM) - <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="the management of capital, evaluating of projects" /></sub>CAPM is<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="The cost of capital, management courses online " /></sub>most widely used approach to calculating <layer id="google-toolbar-hilite-20" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-11" style="background-color: Yellow; color: black;">the</layer></layer> cost of common stock. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="the management of capital, evaluating of projects" /></sub>CAPM uses three components to calculate <layer id="google-toolbar-hilite-22" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-13" style="background-color: Yellow; color: black;">the</layer></layer> cost of common stock - (1) <strong>rf</strong> is<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="The cost of capital, management courses online " /></sub>risk free rate earned by investors (such as U.S. Treasury Bonds; (2)<strong> b</strong> is <layer id="google-toolbar-hilite-24" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-14" style="background-color: Yellow; color: black;">the</layer></layer> beta coefficient which expresses <layer id="google-toolbar-hilite-25" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-15" style="background-color: Yellow; color: black;">the</layer></layer> risk of <layer id="google-toolbar-hilite-26" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-16" style="background-color: Yellow; color: black;">the</layer></layer> common stock in relation to <layer id="google-toolbar-hilite-27" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-17" style="background-color: Yellow; color: black;">the</layer></layer> market; and (3) <strong>rm </strong>is <layer id="google-toolbar-hilite-28" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-18" style="background-color: Yellow; color: black;">the</layer></layer> rate earned in<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="The cost of capital, management courses online " /></sub>market (such as <layer id="google-toolbar-hilite-30" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-19" style="background-color: Yellow; color: black;">the</layer></layer> Standard & Poor’s 500 Composite Index). <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="the management of capital, evaluating of projects" /></sub>CAPM formula is Ccs = <strong>rf + b ( rm - rf )</strong>.<br /><br /><span class="quote">Example 7 - Calculate</span><sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="The cost of capital, management courses online " /></sub><span class="quote">Cost of Common Stock based on CAPM<br /><br />Cantor Corporation has common stock with a listed beta of 1.35. <layer id="google-toolbar-hilite-33" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-21" style="background-color: Yellow; color: black;"></layer></layer></span><sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="the management of capital, evaluating of projects" /></sub><span class="quote"><layer id="google-toolbar-hilite-33" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-21" style="background-color: Yellow; color: black;"></layer></layer> estimated market return is 12% and</span><sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="The cost of capital, management courses online " /></sub><span class="quote">risk free rate based on Treasury Bonds is 6.5%.<br /><br />Ccs = 6.5% + 1.35 ( 12% - 6.5% ) = 13.9%</span><br /><br />3. Bond Plus - A simple approach to calculating <layer id="google-toolbar-hilite-35" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-22" style="background-color: Yellow; color: black;">the</layer></layer> cost of common stock is to add a risk premium to<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="The cost of capital, management courses online " /></sub>cost of debt. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="the management of capital, evaluating of projects" /></sub>formula is Ccs = Cd + risk premium. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="the management of capital, evaluating of projects" /></sub>risk premium is <layer id="google-toolbar-hilite-39" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-25" style="background-color: Yellow; color: black;">the</layer></layer> additional rate that must be paid to common shareholders above what is paid to bond holders.<br /><br /><span class="quote">Example 8 - Calculate</span><sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="The cost of capital, management courses online " /></sub><span class="quote">Cost of Common Stock based on Bond Plus<br /><br />Referring back to Example 5, we calculated a cost of debt of 5.4%. We have estimated a market risk premium on common stock of 4%.<br /><br />Ccs = 5.4% + 4.0% = 9.4%</span><br /><br /><strong id="3">Cost of Preferred Stock (Cps)</strong>: If your capital structure includes preferred stock, <layer id="google-toolbar-hilite-41" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-26" style="background-color: Yellow; color: black;">the</layer></layer> cost of preferred stock is calculated by<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="The cost of capital, management courses online " /></sub>amount of dividends in relation to <layer id="google-toolbar-hilite-43" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-27" style="background-color: Yellow; color: black;">the</layer></layer> market price of <layer id="google-toolbar-hilite-44" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-28" style="background-color: Yellow; color: black;">the</layer></layer> preferred stock. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="the management of capital, evaluating of projects" /></sub> formula is Cps = Dividends / Market Price of Stock.<br /><br /><span class="quote">Example 9 - Calculate</span><sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="The cost of capital, management courses online " /></sub><span class="quote">Cost of Preferred Stock<br /><br />Assume we have preferred stock selling for $ 80 per share and dividends per share are $ 10. <layer id="google-toolbar-hilite-47" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-30" style="background-color: Yellow; color: black;"></layer></layer></span><sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="the management of capital, evaluating of projects" /></sub><span class="quote"><layer id="google-toolbar-hilite-47" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-30" style="background-color: Yellow; color: black;"></layer></layer> cost of preferred stock is:<br /><br />Cps = $ 10 / $ 80 = 12.5%</span><br /><br /><strong id="4">Cost of Retained Earnings</strong>: <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="the management of capital, evaluating of projects" /></sub> cost of retained earnings (internal funds) within a capital structure is similar to<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="The cost of capital, management courses online " /></sub>cost of common stock. We can think of <layer id="google-toolbar-hilite-50" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-32" style="background-color: Yellow; color: black;">the</layer></layer> cost of retained earnings in relation to <layer id="google-toolbar-hilite-51" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-33" style="background-color: Yellow; color: black;">the</layer></layer> opportunity cost of how we can use these funds. Generally, <layer id="google-toolbar-hilite-52" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-34" style="background-color: Yellow; color: black;">the</layer></layer> cost of retained earnings is slightly less than<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="The cost of capital, management courses online " /></sub>cost of common stock since no issuance costs is incurred.<br /><br />After we have calculated each component cost of capital, we will calculate a weighted average based on<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="The cost of capital, management courses online " /></sub>relative market values of each component. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="the management of capital, evaluating of projects" /></sub>following example will illustrate how weighted average cost of capital is calculated.<br /><br /><img src="http://coursgratuits.net/en/3/images/3.PNG" /><br /><br />Our overall cost of capital is calculated as a weighted average based on<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="The cost of capital, management courses online " /></sub>relative market values of each component of capital. If market values are not available, use %’s derived from <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="The cost of capital, management courses online " /></sub>targeted or forecasted capital structure. If worse comes to worse, you can fall back on book values. In any event, <layer id="google-toolbar-hilite-58" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-36" style="background-color: Yellow; color: black;">the</layer></layer> weighted average cost of capital is<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="The cost of capital, management courses online " /></sub>overall cost of capital that will be used to evaluate capital investments. <div style="text-align: right;"><br /></div> <h3 id="5">Cost of Equity and Risk</h3> <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="the management of capital, evaluating of projects" /></sub>Cost of Equity is<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="The cost of capital, management courses online " /></sub>rate of return required by those who invest in equity securities. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="the management of capital, evaluating of projects" /></sub> expected return can be broken down into two components - Risk Free Rate and Risk Premium. A good benchmark for establishing<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="The cost of capital, management courses online " /></sub>Risk Free Rate is <layer id="google-toolbar-hilite-64" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-39" style="background-color: Yellow; color: black;">the</layer></layer> rate paid on 30 year U.S. Treasury Bonds since <layer id="google-toolbar-hilite-65" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-40" style="background-color: Yellow; color: black;">the</layer></layer> risk of default is virtually non-existent. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="the management of capital, evaluating of projects" /></sub>Risk Premium can be established by understanding two forms of risk - Business Risk and Financial Risk. In<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="The cost of capital, management courses online " /></sub>absence of debt, shareholders are confronted with one form of risk, business risk. Business Risk is<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="The cost of capital, management courses online " /></sub>risk of changes to operating income from numerous factors that influence business. When we introduce debt, we have to include financial risk. Financial Risk is <layer id="google-toolbar-hilite-69" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-42" style="background-color: Yellow; color: black;">the</layer></layer> risk of changes to earnings from<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="The cost of capital, management courses online " /></sub>use of increased debt. More debt results in higher interest payments, which impacts earnings. Consequently, <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="The cost of capital, management courses online " /></sub>Risk Premium consists of Business Risk + Financial Risk. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="the management of capital, evaluating of projects" /></sub>following graph summarizes these relationships:<br /><br /><img src="http://coursgratuits.net/en/3/images/4.PNG" /><br /><br />In <layer id="google-toolbar-hilite-73" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-44" style="background-color: Yellow; color: black;">the</layer></layer> above graph, we have a total risk free rate of 5%. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="the management of capital, evaluating of projects" /></sub>addition of business risk increases <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="The cost of capital, management courses online " /></sub>required rate on stock to 10%. When we introduce debt, this adds financial risk and increases <layer id="google-toolbar-hilite-76" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-46" style="background-color: Yellow; color: black;">the</layer></layer> required return on stock. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="the management of capital, evaluating of projects" /></sub> final total rate of return on stock with all forms of risk climbs from 12% to 16% over a range of Debt to Equity Ratios. Since<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="The cost of capital, management courses online " /></sub>cost of capital represents <layer id="google-toolbar-hilite-79" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-48" style="background-color: Yellow; color: black;">the</layer></layer> rate that must be paid to investors for <layer id="google-toolbar-hilite-80" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-49" style="background-color: Yellow; color: black;">the</layer></layer> use of long-term funds, higher risk to investors will increase<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="The cost of capital, management courses online " /></sub>cost of capital.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-980354568365569777.post-11034308084509568592008-09-22T09:49:00.000-07:002009-03-31T06:42:51.918-07:00The Financing DecisionWe have an understanding of what capital is (Chapter 1) and we understand how to calculate<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>cost of capital (Chapter 2). <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="Evaluating the project to make the right decision" /></sub> remainder of this course will focus on how to arrange financing; i.e. how do we actually raise capital. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="Evaluating the project to make the right decision" /></sub> financing decision must consider several factors. Some of these factors include: <ul><li>Flexibility - Today's financing decisions will influence tomorrow's financing decisions. If<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>business expects to raise capital in <layer id="google-toolbar-hilite-4" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-2" style="background-color: Yellow; color: black;">the</layer></layer> future, it can not maximize its use of debt today. We need to provide a cushion so we can have flexibility with future financing decisions.</li><li>Risk - Financing with<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>use of debt will increase risk. There is a limit to how much debt we can use to finance our business. Too much debt can ultimately lead to bankruptcy.</li><li>Income - Financing can influence earnings and thus affect <a href="http://online--courses.blogspot.com/2008/09/return-on-equity-roe_22.html">return on equity</a>. If we are concerned about returns to equity shareholders, then our financing decision will need to be adjusted. Income is also influenced by our ability to take advantage of tax deductions for interest on debt. </li><li>Control - If we have concerns about control over<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>organization, then we have to consider how financing will change control. Financing decisions are connected to either ownership (equity) or creditors (debt).</li><li>Timing - Financing decisions need to be timed to take advantage of<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>marketplace. What type of securities should be sold? When should they be sold? What length of maturity should be used for debt financing?</li></ul> <div style="text-align: right;"><br /></div> <h3 id="1">Refinancing Risk</h3> One of <layer id="google-toolbar-hilite-8" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-6" style="background-color: Yellow; color: black;">the</layer></layer> objectives within<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>financing decision is to match <layer id="google-toolbar-hilite-10" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-8" style="background-color: Yellow; color: black;">the</layer></layer> maturity of liabilities with <layer id="google-toolbar-hilite-11" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-9" style="background-color: Yellow; color: black;">the</layer></layer> life expectancy of assets. This allows liabilities to be self-liquidating. If<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>maturity of liabilities is less than <layer id="google-toolbar-hilite-13" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-11" style="background-color: Yellow; color: black;">the</layer></layer> life expectancy of assets, then you face refinancing risk since you have to raise new capital to pay off liabilities. If<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>maturity of liabilities is longer than <layer id="google-toolbar-hilite-15" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-13" style="background-color: Yellow; color: black;">the</layer></layer> life expectancy of assets, then there will be plenty of assets around to pay off debts. However, these surplus assets may not earn enough to increase<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>market value of <layer id="google-toolbar-hilite-17" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-15" style="background-color: Yellow; color: black;">the</layer></layer> firm.<br /><br /><sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="Evaluating the project to make the right decision" /></sub> mismatching of liabilities with assets can occur if financing is not available. For example, suppose long-term financing is not available. Short-term sources of financing may have to be used. Mismatching can also be intentional. For example, suppose you expect long-term interest rates to fall. You may want to finance assets with short-term maturities since you can refinance in a few years at much lower rates. <div style="text-align: right;"><br /></div> <h3 id="2">Inflation</h3> Another factor to consider in<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>financing decision is inflation. By using debt financing during periods of high inflation, you will repay <layer id="google-toolbar-hilite-20" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-17" style="background-color: Yellow; color: black;">the</layer></layer> debt with dollars that are worth less. As expectations of inflation increase, <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>rate of borrowing will increase since creditors must be compensated for a loss in value. Since inflation is a major driving force behind interest rates, <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>financing decision should be cognizant of inflationary trends.<br /><br /><h3 id="3">Floatation Cost</h3>Equity sources of capital will cost more than debt sources of capital. One reason is due to higher risk to investors. Whenever investors incur more risk, they demand higher rates of return; i.e. risk return tradeoff. Additionally, <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>actual out-of-pocket cost associated with equity financing is higher than debt financing. These costs are referred to as floatation costs. Floatation costs include all costs of issuing <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>securities, such as banker's fees, legal fees, filing costs, etc. <div style="text-align: right;"><br /></div> <h3 id="4">Marginal Cost of Capital</h3> A basic consideration within<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>financing decision is how much money do we need to raise? If we assume that all projects have <layer id="google-toolbar-hilite-26" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-23" style="background-color: Yellow; color: black;">the</layer></layer> same average level of risk, then we can establish an optimal capital budget by plotting<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>Marginal Cost of Capital. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="Evaluating the project to make the right decision" /></sub> relationship between cost of capital and required financing is referred to as<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>Marginal Cost of Capital. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="Evaluating the project to make the right decision" /></sub> Marginal Cost of Capital Rate is<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>discount rate used for capital budgeting analysis. Marginal Cost of Capital is calculated as follows:<br /><br />1. Determine<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>cost and percentage of financing needed for each source of capital - debt, stock, retained earnings.<br /><br />2. Calculate breaking points where<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>weighted average cost of capital begins to increase under different financing plans. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="Evaluating the project to make the right decision" /></sub>break point can be calculated as: Maximum Amount of Lowest Source of Capital / Percent of Financing Provided by this Specific Source of Capital.<br /><br />3. Calculate <layer id="google-toolbar-hilite-35" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-29" style="background-color: Yellow; color: black;">the</layer></layer> weighted average cost of capital over<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>range of financing between <layer id="google-toolbar-hilite-37" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-31" style="background-color: Yellow; color: black;">the</layer></layer> break points.<br /><br />4. A graph can be used to show<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>range of cost of capital in relation to total financing. If a project's internal rate of return is greater than <layer id="google-toolbar-hilite-39" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-33" style="background-color: Yellow; color: black;">the</layer></layer> marginal cost of capital, then<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>project should be accepted.<br /><br /><img src="http://coursgratuits.net/en/3/images/5.PNG" /><br /><br /><img src="http://coursgratuits.net/en/3/images/6.PNG" /><br /><br />At $ 2.8 million, <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>cost of capital jumps from 9.8% to 12.3%. If we compare this graph to our proposed projects, we will select projects A and B since they have an internal rate of return greater than<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>marginal cost of capital (9.8% up to $ 2.8 million and 12.3% above $ 2.8 million). <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="Evaluating the project to make the right decision" /></sub>total investment amount of projects A and B is $ 3.5 million ($ 1.8 for project A + $ 1.7 for project B). Therefore, <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>optimal capital budget for Bishop Corporation is $ 3.5 million. <div style="text-align: right;"><br /></div> <h3 id="5">EBIT / EPS Comparison</h3> In<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>previous example, we selected a 50 / 50 mix for financing capital projects. One of <layer id="google-toolbar-hilite-46" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-39" style="background-color: Yellow; color: black;">the</layer></layer> objectives of capital management is to find<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>right mix of capital. A comparison of Earnings Before Interest Taxes (EBIT) with Earnings per Share (EPS) under different financing plans can help determine which type of financing is most advantageous - debt financing or equity financing. Since debt has little effect on EBIT, we start our analysis with EBIT. We simply want to calculate what EPS will be under each financing plan. Both<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>debt and stock financing plans are plotted on a graph. Depending upon what we expect EBIT to be, <layer id="google-toolbar-hilite-49" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-42" style="background-color: Yellow; color: black;">the</layer></layer> graph can tell us which financing plan will give us<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>highest EPS. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="Evaluating the project to make the right decision" /></sub>following graph plots EBIT and EPS under debt and stock financing:<br /><br /><img src="http://coursgratuits.net/en/3/images/7.PNG" /><br /><br />At a level of $ 2 million EBIT, EPS is<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>same under either <layer id="google-toolbar-hilite-53" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-45" style="background-color: Yellow; color: black;">the</layer></layer> stock or debt financing plan. If we expect EBIT to be below $ 2 million, then we would favor<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>stock plan since it yields a higher EPS. If we expect EBIT to be above $ 2 million, then debt would be preferred over stock after considering<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>increased risk.<br /><br /><img src="http://coursgratuits.net/en/3/images/8.PNG" /><br /><br />In <layer id="google-toolbar-hilite-56" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-48" style="background-color: Yellow; color: black;">the</layer></layer> above example, it is quite clear that Atco can benefit from<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>use of more debt. However, suppose Atco expects EBIT to fall dramatically over<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>next few years. Atco should graph<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>two financing plans under different levels of EBIT. In order to prepare a graph, we need to determine three points:<br /><br />1. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="Evaluating the project to make the right decision" /></sub>minimum level of EBIT needed to cover fixed financing charges (debt and preferred stock) under 100% Stock Plan.<br /><br />2. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="Evaluating the project to make the right decision" /></sub>minimum level of EBIT needed to cover fixed financing charges (debt and preferred stock) under 100% Bond Plan.<br /><br />3. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="Evaluating the project to make the right decision" /></sub>Indifference Point where EPS is<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>same under <layer id="google-toolbar-hilite-64" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-53" style="background-color: Yellow; color: black;">the</layer></layer> 100% Stock Plan and <layer id="google-toolbar-hilite-65" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-54" style="background-color: Yellow; color: black;">the</layer></layer> 100% Bond Plan. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="Evaluating the project to make the right decision" /></sub>following formula can be used to calculate<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>Indifference Point:<br /><br />EPS = ((EBIT - I) (1 - TR) - PD) / number of shares outstanding<br />EPS: Earnings per Share EBIT: Earnings Before Interest Taxes TR: Tax Rate<br />PD: Preferred Dividends<br /><br /><img src="http://coursgratuits.net/en/3/images/9.PNG" /> <img src="http://coursgratuits.net/en/3/images/10.PNG" /><br /><br />Now that we have calculated all three points per Example 13, we can summarize our analysis on<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>following graph:<br /><br /><img src="http://coursgratuits.net/en/3/images/11.PNG" /><br /><br />At an EBIT of $ 760,000, we have an EPS of $ 1.10. <div style="text-align: right;"><br /></div> <h3 id="6">Assessing Risk</h3> Once returns have been analyzed under different financing plans with EBIT / EPS comparisons, it is necessary to assess risk. Coverage ratios are commonly used to assess <layer id="google-toolbar-hilite-69" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-57" style="background-color: Yellow; color: black;">the</layer></layer> risk associated with different financing plans. Coverage ratios show<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>additional risk associated with higher levels of debt financing. Examples of coverage ratios include: <ul><li>Debt to Total Assets Ratio = Total Long-term Liabilities / Total Assets</li><li>Times Interest Earned Ratio = EBIT / Interest Expense</li><li>Times Burden Earned Ratio = EBIT / Interest Expense + (Principal Repayment / (1 - TR))</li></ul> <img src="http://coursgratuits.net/en/3/images/12.PNG" /> <div style="text-align: right;"><br /></div> <h3 id="7">Targeted Debt Levels</h3>One approach to establishing<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>right mix of capital is to follow a targeted debt level. Since some level of debt is desirable for maintaining higher returns, many managers will establish a target debt level for their capital structures (such as 40% of capital should be debt). Therefore, financing decisions should sometimes take into account a targeted set of coverage ratios. One of <layer id="google-toolbar-hilite-72" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-60" style="background-color: Yellow; color: black;">the</layer></layer> principal concerns with using more debt is<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>ability to cover <layer id="google-toolbar-hilite-74" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-62" style="background-color: Yellow; color: black;">the</layer></layer> additional fixed charges. As we just discussed in<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>previous segment, coverage ratios are used to monitor debt levels.<br /><br />Another concern with<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>use of more debt is financial flexibility. As we increase debt, we risk <layer id="google-toolbar-hilite-77" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-65" style="background-color: Yellow; color: black;">the</layer></layer> possibility of closing off this source of financing in <layer id="google-toolbar-hilite-78" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-66" style="background-color: Yellow; color: black;">the</layer></layer> future. If we expect more and more financing in<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>future, then we need to make sure we have <layer id="google-toolbar-hilite-80" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-68" style="background-color: Yellow; color: black;">the</layer></layer> flexibility to tap into debt financing over<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>long-term. <div style="text-align: right;"><br /></div> <h3 id="8"><layer id="google-toolbar-hilite-82" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-70" style="background-color: Yellow; color: black;">The</layer></layer> Overall Process</h3> <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="Evaluating the project to make the right decision" /></sub> basic process for making financing decisions often boils down to three steps:<br /><br />1. Measuring <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub> returns under different financing plans. A comparison of EBIT / EPS under different financing plans can help. You also need to understand how much earnings will grow in<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>future. If you expect EBIT to decline in <layer id="google-toolbar-hilite-86" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-73" style="background-color: Yellow; color: black;">the</layer></layer> future, then you will favor stock over debt. If you expect strong growth in earnings, then you have<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>ability to service higher debt loads and thus you will lean towards debt over equity.<br /><br />2. Assessing<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>risk of each plan. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="Evaluating the project to make the right decision" /></sub>objective is to grow <layer id="google-toolbar-hilite-90" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-76" style="background-color: Yellow; color: black;">the</layer></layer> business with some use of leverage and avoid excessive loads of equity. Coverage ratios (as previously discussed) are widely used to monitor risk. Under ideal circumstances, you want to grow<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>business according to a desired growth rate (G). A desired growth rate can be calculated as follows: G = P x R x A x T where P is Profit Margin, R is Retention Ratio, A is Asset Turnover, and T is Financial Leverage.<br /><br />If <layer id="google-toolbar-hilite-92" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-78" style="background-color: Yellow; color: black;">the</layer></layer> actual growth rate exceeds<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>desired growth rate, then you need to make sure you don't borrow too heavily since you need to maintain borrowing capacity. Higher debt loads for fast growing companies can hold back values. If there is low growth, financing with debt may be preferred since steady cash flows are available to service debt financing. Slow growing companies need to aggressively pursue investment opportunities for increased growth.<br /><br />3. Recognizing<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>need for financial flexibility. Selecting a financing plan that allows for future flexibility can be critical to future success. You must be able to make competitive investments in<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="making financial decision and manage the cost of capital " /></sub>future to maintain or improve market share.<br /><br /><img src="http://coursgratuits.net/en/3/images/1.PNG" />Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-980354568365569777.post-57207746062897766932008-09-22T09:47:00.000-07:002009-03-31T06:54:13.876-07:00The Financial MarketplaceOnce a company has decided how much capital to raise and <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub> best mix of capital, it must go to the marketplace to raise<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>capital.<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="managment of money, making financial decision" /></sub> Financial Marketplace is where investors and companies trying to raise capital come together. Capital markets trade long-term sources of funds, such as stocks and bonds. Capital markets can be broken down into primary markets and secondary markets. Primary markets are those markets where new issues of securities are sold. Secondary markets are where outstanding securities are traded (such as<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>New York Stock Exchange).<br /><br /><sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="managment of money, making financial decision" /></sub> trading of stocks and bonds will usually involve<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>use of financial intermediaries, such as banks, pension funds, mutual funds, finance companies, etc. Therefore, the actual source of capital comes from financial intermediaries that purchase<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>securities. One of the most important financial intermediaries is<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>Investment Banker.<br /><br /><h3 id="1">Investment Bankers</h3> Investment Bankers provide critical services for raising capital. They help sell new securities by establishing<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>price of the security. Investment Bankers determine how the securities will be sold and they distribute<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>securities to investors. Investment Bankers also investigate the company prior to issuance of securities and certify<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>issue. This function is necessary in the United States since the sale of securities must be registered with<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>Securities and Exchange Commission (SEC).<br /><br /><sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="managment of money, making financial decision" /></sub>process for selling securities is called underwriting. Underwriting involves the purchase of securities by<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>Investment Banker and the resale of securities to investors. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="managment of money, making financial decision" /></sub>difference between the two prices (purchase vs. sale) is called<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>spread. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="managment of money, making financial decision" /></sub> spread represents compensation to the Investment Banker for services rendered.<br /><br /><sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="managment of money, making financial decision" /></sub>Investment Banker wants to set a low price for<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>sale of securities so that he can sell all of the securities. On the other hand, the company trying to raise capital wants a high price to raise as much capital as possible. Therefore, establishing<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>right price for securities can be very difficult. For seasoned issues of securities, <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>offering price can be linked to the price of existing securities. For example, <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>price for a common stock issue can be set at a certain percentage below the closing market price on<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>last day of the SEC Registration Period. <div style="text-align: right;"><br /></div> <h3 id="2">Initial Public Offerings (IPO’s)</h3>Private and closely held companies become publicly traded companies by "going public." <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="managment of money, making financial decision" /></sub> process for going public is called an Initial Public Offering or IPO. An IPO is a major transformation for a company whereby<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>company raises capital by issuing stock for the first time. Going public also establishes a market price for<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>company. However, going public has several disadvantages:<br /><br />1. IPO’s require registration with<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>SEC.<br />2. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="managment of money, making financial decision" /></sub>Company is now subject to increased scrutiny and review by investors and other outside interest.<br />3. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="managment of money, making financial decision" /></sub>IPO process can be very difficult on those who are directly involved in making it happen.<br />4. New owners (shareholders) can be demanding, putting pressure on management for higher earnings and growth.<br />5. Stock prices may not accurately reflect<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>value of the company.<br /><br />In order to go public, a company must apply for membership with an exchange where its stock will be traded. There are requirements for stock exchange membership, such as complete disclosure of financial information. Additionally, <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>company must register with the SEC since the sale of stock will take place in interstate commerce. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="managment of money, making financial decision" /></sub>purpose of a registration statement is to inform investors on<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>merits of the new stock offering. Registration statements include<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>following: <ul><li> Description of company assets</li><li> Complete set of audited <a href="http://online--courses.blogspot.com/2008/09/comparing-financial-statements.html">financial statements</a></li><li> Statement concerning how capital will be used</li><li> Description of any provisions contained in<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>securities</li></ul> <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="managment of money, making financial decision" /></sub>Registration Process has three distinct periods:<br /><br />1. Pre-Filing Period: Preliminary negotiations and conferences between the issuer of securities and<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>Investment Banker will take place during the Pre-Filing Period. During this period, basic issues such as how much capital can be raised and what type of securities should be issued are addressed. During<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>Pre-Filing Period, offers to buy or sell securities are prohibited.<br /><br />2. Waiting Period: This period starts when<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>Registration Statement is filed with <layer id="google-toolbar-hilite-64" style="background-color: Yellow; color: black;">the</layer> SEC. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="managment of money, making financial decision" /></sub>20-day waiting period gives <layer id="google-toolbar-hilite-66" style="background-color: Yellow; color: black;">the</layer> SEC a chance to review <layer id="google-toolbar-hilite-67" style="background-color: Yellow; color: black;">the</layer> Registration Statement. If <layer id="google-toolbar-hilite-68" style="background-color: Yellow; color: black;">the</layer> Registration Statement is incomplete,<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>SEC will issue comments on how to correct <layer id="google-toolbar-hilite-70" style="background-color: Yellow; color: black;">the</layer> Registration Statement. Any amendments to<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>Registration Statement result in a new 20-day waiting period.<br /><br />During <layer id="google-toolbar-hilite-72" style="background-color: Yellow; color: black;">the</layer> waiting period, <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>Investment Banker will publish a tombstone ad that describes <layer id="google-toolbar-hilite-74" style="background-color: Yellow; color: black;">the</layer> pending issue of securities. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="managment of money, making financial decision" /></sub>tombstone ad must include: <ul><li>Name of Issuer</li><li>Amount of securities being offered</li><li>Approximate date of offering</li><li>Price of securities if known</li></ul>Additionally, investors can obtain a prospectus that contains information similar to what is contained in<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>Registration Statement. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="managment of money, making financial decision" /></sub>outside cover of <layer id="google-toolbar-hilite-78" style="background-color: Yellow; color: black;">the</layer> prospectus will be stamped in red ink - "Preliminary Prospectus." Investors sometimes call this prospectus a "red herring." Similar to<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>pre-filing period, offers to sell or buy<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>securities are prohibited. However, oral offers can be accepted during <layer id="google-toolbar-hilite-81" style="background-color: Yellow; color: black;">the</layer> 20-day waiting period.<br /><br />3. Post Effective Period: Once approved by <layer id="google-toolbar-hilite-82" style="background-color: Yellow; color: black;">the</layer> SEC, <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>Registration Statement becomes effective and <layer id="google-toolbar-hilite-84" style="background-color: Yellow; color: black;">the</layer> securities can be sold to investors. A final prospectus must be made available to investors. Prior to issuing<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>securities, <layer id="google-toolbar-hilite-86" style="background-color: Yellow; color: black;">the</layer> Master Registration Statement is updated by filing a short form with<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub><layer id="google-toolbar-hilite-87" style="background-color: Yellow; color: black;"></layer> SEC.<br /><br /><sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="managment of money, making financial decision" /></sub> final price for <layer id="google-toolbar-hilite-89" style="background-color: Yellow; color: black;">the</layer> securities is set at<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>closing day when <layer id="google-toolbar-hilite-91" style="background-color: Yellow; color: black;">the</layer> SEC clears <layer id="google-toolbar-hilite-92" style="background-color: Yellow; color: black;">the</layer> issue. Investment Bankers pay <layer id="google-toolbar-hilite-93" style="background-color: Yellow; color: black;">the</layer> issuer of securities by <layer id="google-toolbar-hilite-94" style="background-color: Yellow; color: black;">the</layer> fourth day after securities have been issued and investors are required to pay<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>Investment Banker by <layer id="google-toolbar-hilite-96" style="background-color: Yellow; color: black;">the</layer> tenth day. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="managment of money, making financial decision" /></sub><layer id="google-toolbar-hilite-97" style="background-color: Yellow; color: black;"></layer> process of raising capital is now complete. <div style="text-align: right;"><br /></div> <h3 id="3">Private Placements</h3><sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="managment of money, making financial decision" /></sub>issuance of equity and debt securities will sometimes take place directly between <layer id="google-toolbar-hilite-99" style="background-color: Yellow; color: black;">the</layer> issuer and <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub> investor. This is type of direct issue is referred to as a private placement. Usually a select group of investors is involved and most private placements are for <layer id="google-toolbar-hilite-101" style="background-color: Yellow; color: black;">the</layer> issuance of debt instruments, not stock. Additionally, direct business loans with a term more than 15 years are classified as private placements.<br /><br />Private placements are not subject to formal registration with<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>SEC and thus, they are less expensive to issue. However, since securities are not sold in an established capital market, <layer id="google-toolbar-hilite-103" style="background-color: Yellow; color: black;">the</layer> placement of securities will often involve restrictive covenants imposed by<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>investors. Since there is a lack of market for<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>securities, investors will demand a higher rate of return.<br /><br />Although private placements are exempt from SEC registration, certain rules (Regulation D) are imposed on private placements: <ul><li> No advertising of<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>securities is allowed</li><li> <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="managment of money, making financial decision" /></sub>issuing company must exercise care to ensure that investors are buying for their own accounts and not engaged in underwriting services.</li><li> <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="managment of money, making financial decision" /></sub>SEC must be notified within 15 days of<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>first offering. </li></ul> <div style="text-align: right;"><br /></div> <h3 id="4">Course Summary</h3> <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="managment of money, making financial decision" /></sub>cost associated with capital is rarely reflected on <layer id="google-toolbar-hilite-111" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-66" style="background-color: Yellow; color: black;">the</layer></layer> Income Statement. Accordingly, many financial managers mistakenly think there is no cost of capital. Therefore, one of <layer id="google-toolbar-hilite-112" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-67" style="background-color: Yellow; color: black;">the</layer></layer> first steps in managing capital is to calculate<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>cost of capital. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="managment of money, making financial decision" /></sub>cost of capital is calculated as<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>weighted average of each capital component - long-term debt, common stock, preferred stock, and retained earnings.<br /><br /><sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="managment of money, making financial decision" /></sub>cost of capital serves as<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>benchmark for making investment decisions. If a project can earn a rate of return higher than <layer id="google-toolbar-hilite-118" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-70" style="background-color: Yellow; color: black;">the</layer></layer> cost of capital, then <layer id="google-toolbar-hilite-119" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-71" style="background-color: Yellow; color: black;">the</layer></layer> market value of<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>firm will increase.<br /><br />Not only do we need to understand<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>cost of capital, but we need to find <layer id="google-toolbar-hilite-122" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-72" style="background-color: Yellow; color: black;">the</layer></layer> right mix of capital components. To find<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>right mix, we need to consider several factors. Three important factors to consider are:<br /><br />1. What are <layer id="google-toolbar-hilite-124" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-73" style="background-color: Yellow; color: black;">the</layer></layer> returns (EPS) under each of<sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>financing plans? We can compare EPS at different levels of EBIT and select <layer id="google-toolbar-hilite-126" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-74" style="background-color: Yellow; color: black;">the</layer></layer> best plan to maximize returns.<br /><br />2. What is <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub>risk of each financing plan? We can use coverage ratios to assess risk.<br /><br />3. Finally, we need to make sure that <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub> financing plan does not limit our financing options in <layer id="google-toolbar-hilite-129" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-75" style="background-color: Yellow; color: black;">the</layer></layer> future. We need to have flexibility year after year when it comes to financing.<br /><br />Once we have determined <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub><layer id="google-toolbar-hilite-130" style="background-color: Yellow; color: black;"></layer> right mix of capital, we must raise <layer id="google-toolbar-hilite-131" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-76" style="background-color: Yellow; color: black;">the</layer></layer> capital by having investors purchase <layer id="google-toolbar-hilite-132" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-77" style="background-color: Yellow; color: black;">the</layer></layer> securities. <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_ztisI0lf56UklWy2msHvbAWZNKyiRP23zRLr1rfjdgx-BfnrOn6tlL4MP3tUYL8HIFxMifwYpTS259cyQbA8lMfnvpjdIdzGPi92KpytEPuMPCPEiUjyoQpz0hCcx6XwmvA2gXArScfe/s200/online-courses-the-image.png" alt="managment of money, making financial decision" /></sub>capital markets bring investors and companies trying to raise capital together. Investment Bankers often serve as <layer id="google-toolbar-hilite-134" style="background-color: Yellow; color: black;"><layer id="google-toolbar-hilite-79" style="background-color: Yellow; color: black;">the</layer></layer> middleman in underwriting <sub><img style="border: 0px none ;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGW4QgMGrjDqNk1fyw_Fm-qwibWQDKMV8P83wtsIkPqj5aYvacMOv7O8WyiRU34H5iXn52oLaLU6RIkiy6vGWe_bfFlc4fYsQ3i3aYNHvcblKTOceNmGbmEOup1NDr9Rw5SoX-ubwm3wsw/s200/online-courses-the-image-min.png" alt="understanding the management of capital in the marketplace " /></sub> issue of securities.Unknownnoreply@blogger.com0