Cost of capital can help define the acceptability of investment opportunities. Besides, the cost of capital can scheme the corporate finance arrangement. Generally, the best way for designing the corporate finance structure is based on information of changing of the capital market. So, manager can figure out information like accounting reports and their cost of capital to market. By using the information, manager can use cost of capital for restructure the market price and earning per share in order to bring advantage for company.
Budgeting is an essential plan that helps a business understand the probable expenditure and income over a specific period. It is a tool to help the business to provide better financial control for expenditure and also to give the business a clearer direction to achieves the goal. Before setting a budget, it usually brings information together and then interprets of the business and follows by strategic plan. The business will base on the economy needs and individual business capability to come out with statistics and plan ahead on projected the amount of money to use at a certain period and the how much profit will estimate earn. It needs to forecast in a realistic figures and attainable goal.
1. Cost of Capital Pratt and Grabowski (2010) defined cost of capital is the expected rate of return required by the managers in order to seeking additional funds for a particular investment. It measures the total costs to finance an investment through a combination of debt and equity taking into account different financial risks. There are several reasons why estimating the cost of capital is vital for the management of the company. First of all, cost of capital forces managers to reconsider the capital structure in order to discover the better approach to raise finances.
For each type, give an example of a business transaction that would be relevant Three types of management decisions are what type of long term investments to take on (Capital Budgeting), where to get the financial backing for the investments (Capital Structure), and how to manage the everyday financial activities (Working Capital Management). Some examples of capital budgeting would include purchasing a new building, purchasing expensive equipment, or developing a new product line. Establishing the capital structure for the corporation could include bringing in other owners or borrowing money from lenders. Deciding how much to outsource and borrow are crucial when considering the return on the investment. Working capital is a firms short term assets that manages daily cash flow.
Ratios can tell if the business is using its assets appropriately, and if liabilities of the company are well-managed. It shows whether a business can invest in more capital, or if there is room for business growth. It shows whether a business will be able to pay off its debts or their short-term expenses or their daily expenses. It basically shows the strength and weaknesses of the business. It helps for forecasting on making certain financial decisions.
Managers need to make investment decisions and calculating NPV can help them to see the likelihood of investment being profitable. There are a variety of ways to estimate net present value, such as the discounted cash flow approach and the discounted payback method etc. However, there is risk, because there is no guarantee that the estimations will turn out to be correct. The net present value rule or NPV devised by Hirshleifer (1958), is the fundamental model of how firms decide whether to invest in a project, commonly known as the ‘investment decision’, or ‘capital budgeting decision’. With the assumption that a firm’s objective is to maximise shareholder wealth through maximising a company’s market value, firms allocate resources to their most productive use, therefore responding to the needs of stakeholders.
Answer 'Capital Budgeting' Step into the shoes of a financial analyst. Discuss which steps of the capital budgeting process you would find the most challenging and state why. Discuss the pros and cons of applying different investment decision rules when faced with the choice of investing corporate funds. Provide two examples Capital Budgeting is a process of long range planning involving investment of funds in long term activities whose benefits are expected over series of years. For example, installing machinery, creating additional capacity to manufacture a part of the machinery which at present is purchased from outside.
MULTIPLE CHOICE QUESTIONS 1. The statement of cash flows should help investors and creditors assess each of the following except the a. entity's ability to generate future income. b. entity's ability to pay dividends. c. reasons for the difference between net income and net cash provided by operating activities. d. cash investing and financing transactions during the period.
Classified into short-term or long-term facilities Short-term = money Long-term = capital Suppliers of loans or debt funds face credit risk Credit risk: the risk the borrower won’t pay back loan Funds supplied in the form of the acquisition of an ownership share of a business. Longer-term Referred to as capital investment Equity investors face investment risks, but are compensated with dividend payments and capital growth (increase in ownership shares over time) Investment risk: the possibility that the investor’s return will not be realised 1.5 What are some problems with direct financing that make indirect financing more attractive? Direct financing: financing in which DSUs issue financial claims on themselves and sell them for money directly to SSUs. The SSU’s claim is against the DSU, not a financial intermediary. Some problems with direct financing include the denominations of the
The company’s objectives include continuing to secure sustainable growth through acquisitions and then attain successful integration of those acquisitions. In addition executive management seeks to improve the company’s business activities by implementing infrastructure improvements, improve the quality of customer service, and lower operating costs. Although these objectives are of significant importance the executive managers also recognize the need to implement financial strategies to reduce risk and to implement a strategic growth management plan. Functional Tactics Functional tactics are derived from the company’s business strategy