Cost Of Capital Essay

512 words - 2 pages

The cost of capital and bond rating are very important in the capital budgeting process. “Capital budgeting is the planning process used to determine a firm's long term investments such as new machinery, replacement machinery, new plants, new products, and research and development projects.” (wikipedia.org) Most companies finance their capital projects by either issuing stock, issuing debt, and reinvesting prior earnings. There are many formal methods used in today’s capital budgeting process, these include the classic rule which is to take on only projects with positive Net Present Value (NPV). The project's cost of capital is the rate investors require to undertake the investment, and should discount all future cash flows at this rate key input to the capital budgeting process is the cost of capital. The cost of capital for a company is based on the cost of equity and the cost of debt which is a weighted sum of these two factors. Money that is Re-invested is also listed at the cost of equity; since the money was not reinvested it would normally be returned to the firm’s shareholders. Investors in a company expect the retained earnings to earn a return similar to money initially invested. The cost of debt to a company is the cost of borrowing that money.Standard and Poor's and Moody's are among the groups which rate the risk of corporate, municipal, and government issued securities. These companies give each security a bond rating which determines the risk factor. The rating is based on two key elements. The first element is the probability or possibility that the company will file...

Find Another Essay On Cost of Capital

Cost of Capital at Ameritrade Essay

704 words - 3 pages brokerage industry and Charles Schwab, E*Trade, Waterhouse, and Quick and Reilly Group, in order to accurately measure Beta and likewise risk.Using the stock price and returns data in Exhibits 5 and 6 and the capital structure information in Exhibit 4 estimate the equity beta βs, asset beta βa and the cost of assets, ka, for (i) discount brokerage firms and (ii) investment services firms as comparable groups, assuming (i) debt beta=0

Nike's Weighted Average Cost of Capital

1433 words - 6 pages . However, other companies that NorthPoint has invested in for its fund which include ExxonMobil, General Motors, 3M, and McDonalds, have by far outperformed Nike in the financial markets in 2001 and are keeping the fund afloat while the rest of the economy continues to slide.Cost of Capital When determining the true value of a stock, one of the most important figures we must analyze is the firm?s weighted average cost of capital, or WACC. The WACC

The Cost of Equity Capital and the Capital Asset Pricing Model

1785 words - 7 pages When discussing the cost of equity capital, or the rate of return required by investors for their share expenses, there are three main models widely used for analyzation. These models are the dividend growth model, which operates on the variable of growth and future trends, the capital asset pricing model (CAPM), which operates on the premise that higher returns are a result of higher risk, and the arbitrage pricing theory (APT), which has a

The Cost of Capital is a critical element in business decisions

4025 words - 16 pages The Cost of Capital is a CriticalElement in Business DecisionsA Report submitted in partial fulfilment of the requirements for the award of Master of Science of the Loughborough University.November 2004ABSTRACTThis paper discusses the issue of whether the Cost of Capital is a critical element in business decisions through the topics of Capital Structure and the effects of the Cost of Capital on a company's competitiveness.Through the use of both

The Cost of Capital is a Critical Element in Business Decisions

3689 words - 15 pages PAGE \* MERGEFORMAT 15 The Cost of Capital is a Critical Element in Business DecisionsMark FrystakAmerican Public University SystemFINC 600 Corporate FinanceMany of the critical decisions that business owners and senior management face can be categorized as investment opportunities. Whether building a new facility, taking over another business or expanding their investment portfolio, managers and owners are frequently making investment

Distinguish any CGT issues on Grundnorm's case

1631 words - 7 pages for the financial year of 2003/2004.5) Timing of CGT event:Grundnorm acquired the land and the house on 1 July 1992. Therefore, the asset is subject to the CGT regime. Grundnorm disposed the property on 1 May 2004. Therefore, Grundnorm can elect whether or not to make the capital gain calculation using an indexed cost base provided for in Div 110 or calculating a discount capital gain according to Div 115. Also it has to be known that the cost

merits and demrits of internal rate of return

587 words - 2 pages 1. No concrete decision criteria to indicate whether an investment increases the firm's value 2. Ignores cash flows beyond the payback period 3. Ignores the time value of money 4. Ignores the risk of future cash flows Discounted Payback Period Advantages Disadvantages 1. Considers the time value of money 2. Considers the riskiness of the project's cash flows (through the cost of capital) 1. No concrete decision criteria that indicate

The Key Environmental Forces That Have Immediate Strategic Implications for Capital One

1314 words - 5 pages products and automobile financing. The credit card and automobile industry are taking a big hit currently due to the economy not doing too good. Firms locally and globally are cutting cost by laying off their work force. Because of this the key environmental forces that have immediate strategic implications for Capital One are the increase in the number of personal bankruptcies during the recession. The unemployment rate is going up. The consumer

Considerations for Capital Structure

907 words - 4 pages Capital structure is a mixture of debt and equity, this decision is very important for a company as it is a cost for the company because it is borrowed money. This decision is very critical for the company because of different tax implications of debt equity and also the effect of corporate taxes on the profitability and revenues of the firm. Firms must be careful in their borrowing activities in order to avoid financial distress, excessive risk

Capital Budgeting in small Firms

815 words - 3 pages cash used in paying taxes of projects. The best return is if the funds are not invested as capital cost in projects such as opportunity costs of company which can be done by using already owned asset in different shape. The cost of the asset can be opportunity cost for the company. The induction of assets for the projects is also a part of budgeting process because it includes the cost that will be used in future usage of the asset.(Marc Ross

NIKE case

1074 words - 4 pages NIKE, INC: COST OF CAPITALNorthPoint Group, a mutual management firm is weighting whether to buy Nike's stock or not. The firm has experienced sales growth, profits and market share decline. Nike is now committing to cut down expenses while increasing growth and operating performance.Kimi Ford has asked her assistant, Joanna Cohen, to estimate Nike's cost of capital. The cost of capital depends on the mode of financing used. In this case, the

Similar Essays

Nike : Cost Of Capital Essay

2297 words - 9 pages Nike, Inc.: Cost of CapitalThe cost of capital can be thought of as the minimum return required by providers of finance for investing in an asset, whether that is a project, a business unit or an entire company. It needs to reflect the capital structure used to finance the investment (Cornelius, 2002). For companies which raise funds from multiply sources such as bank loans, share issues, venture capitals and so on, an appropriately estimate

Cost Of Capital Punishment Essay

606 words - 2 pages Running Head: COST OF CAPITAL PUNISHMENTCost of Capital punishment[Writer Name][Institute Name]Cost of Capital punishmentContrary to popular belief, a capital punishment does not cost more than life in prison. The reason why modern executions cost so much is because of all the legal proceedings. However, what if we used the most effective execution machine through history? The guillotine, Therefore the cost of the capital punishment would go

Cost Of Capital Punishment Essay

1029 words - 4 pages process so the state is not spending millions of dollars on sentencing and trials that could be used for useful repairs the state needs or expenses the state has.References(1990, February). A matter of engineering. The Atlantic. Retrieved from http://www.theatlantic.com/doc/199002/electric-chair/2Costanzo, M., & White, L. (1994). An overview of the death penalty and capital trials: History, current status, legal procedures, and cost [Online

Marriot Corporation Cost Of Capital Essay

929 words - 4 pages 1.Marriott uses its' cost of capital estimates to create a hurdle rate to effectively run operations. Marriott uses these estimates to operate its four financial strategies. These are managing rather then owning hotel assets, investing in projects that increase shareholder value, optimizing the use of debt in the capital structure and repurchasing undervalued shares. If the company uses its overall WACC it may have divisions accept projects with