CapitalBudgeting
MODULE9CAPITALBUDGETINGTHEORIES:BasicConceptsDecisionMakingProcess2. Thefirststepinthedecision–makingprocessistoA.determineandevaluatepossiblecoursesof actionBidentifytheproblemandassignresponsibilityCmakeadecisionDreviewresultsof thedecision.Strategicplanning39.Strategicplanningistheprocessofdecidingonanorganization' A.minorprogramsandtheapproximateresourcestobedevotedtothemB.majorprogramsandthe approximateresourcestobedevotedtothemC.minorprogramspriortoconsiderationofresources thatmightbeneededD.majorprogramspriortoconsiderationofresourcesthatmightbeneeded Capitalbudgetingdefined1showmorecontent
B.aninvestmentinworkingcapitalisreturnedinfullattheendofaproject'slife,whilean investmentindepreciableassetshasnoresidualvalue.C.aninvestmentinworkingcapitalisnot tax–deductiblewhenmade,nortaxablewhenreturned,whileaninvestmentindepreciableassets doesallowtaxdeductions.D.becauseaninvestmentinworkingcapitalisusuallyreturnedinfullat theendoftheproject'slife,itisignoredincomputingtheamountoftheinvestmentrequiredforthe project.30.ThepropertreatmentofaninvestmentinreceivablesandinventoryistoA.ignoreitB. addittotherequiredinvestmentinfixedassetsC.addittotherequiredinvestmentinfixedassets andsubtractitfromtheannualcashflowsDaddittotheinvestmentinfixedassetsandaddthe presentvalueoftherecoverytothepresentvalueoftheannualcashflows31.Inconnectionwitha capitalbudgetingproject,aninvestmentinworkingcapitalisnormallyrecoveredA.attheendof theproject'slifeB.inthefirstyearoftheproject'slifeC.evenlythroughtheproject'slifeD.when thecompanygoesoutofbusinessA32.XYZCo.isadoptingjust–in–timeprinciples.When evaluatinganinvestmentprojectthatwouldreduceinventory,howshouldXYZtreatthereduction?
A.Ignoreit.B.Decreasethecostof
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ThesisonCapitalStructure
CAPITALSTRUCTUREMANAGEMENTINNEPAL(ACASESTUDYONNABIL,NIBL,
NEA,NTC&HGICL)TableofContents:RecommendationIViva–VoceSheetIIDeclarationIII AcknowledgementIVListofFiguresVListofTablesVIAbbreviationVIICHAPTERI. INTRODUCTIONPgNo.1.Backgroundofthestudy12.Historyofbank53.Growthofindustries inNepal54Statementofproblem75Objectivesofthestudy86Significanceoftheshowmore content...
Environmentencouragingtheindustrialgrowthismissinginthepicture.Themanufacturingsector inNepalissmallcontributing8%ofitssharetothetotalGDPItconsistsmainlyofsmall industries.Capitalgoodsindustriesarefewinnumber.Mostofthesectorsmanufacturefoodeven thoughthestructureischanging.Thissectorconsistsoffivesub–sectorsnamelya.Food,Beverage andTobaccob.Textileandgarmentc.Chemicald.MechanicalEngineeringe.Electricaland ElectronicsTheproductiongrowthhasbeensignificantinpaper,food,footwear,ironandsteel, beverageandchemicalindustriesFundisthemostimportantcriteriatooperateanykindofbusiness ororganization.Itcanberaisedbytwosourcesi.e.EquityCapitalandDebtCapital.Thesetwo sourcesofcapitalcomprisethetotalcapitalstructure.CapitalStructurereferstothecompositionof allsourceandamountoffundscollectedtouseorinvestinbusiness.InotherwordsCapital structurereferstothecapitalandlong–termliabilitiesofbalancesheet.Therefore,itincludes shareholder'sfundandlongtermloansItisdifferentfromfinancialstructureasfinancialstructure includesbothlongtermandshorttermsourceoffinancingwhilecapitalstructureincludesonlylong termsourceoffinancing.Thus,afirm'scapitalstructureisonlyapartofitsfinancialstructure.
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Bydefinition,Capitalismisaneconomicsystemcontrolledchieflybyindividualsandprivate companiesinsteadofbythegovernment.Inthissystem,individualsandcompaniesownanddirect mostoftheresourcesusedtoproducegoodsandservices,includinglandandothernaturalresources labor,and"capital"."Capital"includesfactoriesandequipmentandsometimesthemoneyusedin businesses(Friedman,5)
Capitalismstressesprivateeconomicdecisions.Peoplearefreetodecidehowtheywillearnand spendtheirincome.Companiesmaychoosewhichgoodsandservicestoproduceandhowmuchto chargeforthemTheyalsocompetewithoneanothertosellproductsNationswhoseeconomiesare basedoncapitalismincludetheUnited...showmorecontent...
Butevenmorethanthat,wecommemoratethebirthofAmericansasfreemen.Atasinglestroke, theDeclarationofIndependenceanditsideassetAmericafreefromEngland,andsetAmericans freefromtheirowngovernment.TheFoundingFathersinstitutedAmerica'sgovernmenttoprotect thefreedomofitscitizens,andtosecuretheirrightsto"Life,LibertyandthePursuitof Happiness."
TheserightswerecreatedtosecurefreedomofthoughtandactionforallAmericans.Freedomof thoughtisthefreedomofanindividualtousehismind:toeducateandinformhimself;tomakehis ownjudgments;toreachhisownconclusions;tosethisdecisions;toholdhisbeliefs;tochoosethe wholecourseofhislife.Freedomofactionisthefreedomofanindividualtoactonhisown judgment:topursuehis/hervalues;tostriveforhis/hergoals;toworkandtokeeptheproductof his/herwork;toassociateandtradewithothers;toactfortheattainmentofhis/herinnerhappiness Theimplementationofindividualrightshadrevolutionaryeffects.Thefreedomandprogressthat followedwereunprecedented.Individuals,freefromgovernmentinterference,pursuedtheir happinessrestlesslyandproducedtremendousamountsofwealthintheprocess.Individualstook responsibilityfortheirlives:fortheireducation,theirhealthcare,theirjobs,their
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CapitalismEssay
CulturalCapital
Whetheryoumayknowitornot,wewillallpossesssometypeofcapitalinourlives.Capitalis everywhere,andisawide–rangingideathatisbeneficialtoasocietyandpeoplealike.Thereare manytypesofcapital;however,CulturalcapitalandSocialcapitalaretwocommontypesofcapital thathavebeenstudiedbySociologistsfordecades.Culturalcapitalreferstonon–economicthings likeskillsandarts,andsocialcapitalrefersthebenefitsofsocialnetworksInmylife,Icurrently possessbothculturalandsocialcapital.Myculturalcapitalmostlycomesfrommyeducation.After almost12yearsofschooling,Ihavelearnedmanythings,however,myculturalcapitaldoesnot comefromtheactualknowledgeitself,butfromtheskillsIhavedevelopedbygrowingupina publicschoolandinagenerallyurbancity.Ihavelearnedskillsasachildsuchashowtoread, write,andspeak,whicharethemostimportantskillstodevelopforchildren.Butotherthanthese manifestfunctions,Ihavealsodevelopedlatentfunctionssuchasknowinghowtosocialize,howto study,andevenhowtodress.Thesethingswereintendedformetolearn,however,theywerenever exactlytaughttomeinmyyearsofschoolingIfthingssimilartotheseweretaughtinschools, it...showmorecontent...
Eversincemiddleschool,Ihavebeentakingadvancedclasses.Takingtheseadvancedclasses classifyme,aswellastheothersintheseclasses,asbeingacapablemindedstudentlookingtowards college.Thisputsusinasubcultureatourschoolinwhichweallsharecommonvaluesofour educationTakingtheseadvancedclassesalsoshowstoothersthatwearededicatedstudentstoour education,andhavebenefiteduswhenapplyingtocollegeorforjobs.Thesebenefitsalsoextend outtoreceivingscholarships,astheadvancedstudentsaremorelikelytoreceivecertain scholarshipsthatotherstudentsmaynotbeavailable
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JamesD.Lowe TridentUniversityInternational FIN301–PrinciplesofFinance Module3
CaseAssignment
Assignment:
1Foreachofthescenariosbelow,explainwhetherornotitrepresentsadiversifiableoran undiversifiablerisk.Pleaseconsidertheissuesfromtheviewpointofinvestors.Explainyour reasoning
a.There'sasubstantialunexpectedincreaseininflation.
b.There'samajorrecessionintheU.S. cAmajorlawsuitisfiledagainstonelargepubliclytradedcorporation
2.UsetheCAPMtoanswerthefollowingquestions:
a.FindtheExpectedRateofReturnontheMarketPortfoliogiventhattheExpectedRateofReturn onAsset"i"is12%,theRisk–FreeRateis4%,andtheBeta(b)forAsset"i"is1.2.showmore content...
Diversifiablerisk
Theentireeconomywillnotbeaffected;infactsomecompaniesinareasnotaffectedbythelawsuit willbenefitastheywillbeabletofillavoidinthemarketasthecompanyinquestionfaceslegal precedings
2.UsetheCAPMtoanswerthefollowingquestions:
a.FindtheExpectedRateofReturnontheMarketPortfoliogiventhattheExpectedRateofReturn onAsset"i"is12%,theRisk–FreeRateis4%,andtheBeta(b)forAsset"i"is12
CAPM(CapitalAssetPricingModelequationis:rA=rf+betaA(rm–rf)riskfreerate=rf=4% betaofstock=betaA=12returnonmarketportfolio=rm=tobedeterminedrequiredreturnon stockrA=12.00%
Therefore,rm=10666%=(12%–4%)/12+4%
Answer:returnonmarketportfolio=10.666%
bFindtheRisk–FreeRategiventhattheExpectedRateofReturnonAsset"j"is9%,theExpected ReturnontheMarketPortfoliois10%,andtheBeta(b)forAsset"j"is0.8.
CAPM(CapitalAssetPricingModelequationis:rA=rf+betaA(rm–rf)riskfreerate=rf= betaofstock=betaA=0.8returnonmarketportfolio=rm=10%requiredreturnonstockrA=9%
Therefore,rf=5%=(08*10–9)/(08–1)
EssayonCapitalAssetPricingModel
c.WhatdoyouthinktheBeta(ß)ofyourportfoliowouldbeifyouownedhalfofallthestocks tradedonthemajorexchanges?Explain.
Thebetawouldbecloseto1 Thisis
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Answer:riskfreerate=5%
CAPITALMARKEt
Acapitalmarketisamarketforsecurities(debtorequity),wherebusinessenterprises(companies) andgovernmentscanraiselong–termfunds.Itisdefinedasamarketinwhichmoneyisprovidedfor periodslongerthanayearThecapitalmarketincludesthestockmarket(equitysecurities)andthe bondmarket(debt).Moneymarketsandcapitalmarketsarepartsoffinancialmarkets.Financial regulators,suchastheUK'sFinancialServicesAuthority(FSA)ortheU.S.SecuritiesandExchange Commission(SEC),overseethecapitalmarketsintheirdesignatedjurisdictionstoensurethat investorsareprotectedagainstfraud,amongotherduties.
Capitalmarketsmaybeclassifiedasprimarymarketsandsecondarymarkets.Inshowmore content...
FinancialIntermediaries:ThefourthimportantsegmentoftheIndiancapitalmarketisthefinancial intermediaries.Thiscomprisesvariousmerchantbankinginstitutions,mutualfunds,leasingfinance companies,venturecapitalcompaniesandotherfinancialinstitutions. TheseareimportantinstitutionsandsegmentsintheIndiancapitalmarket.
Primarymarketisthatpartofthecapitalmarketsthatdealswiththeissuanceofnewsecurities Companies,governmentsorpublicsectorinstitutionscanobtainfundingthroughthesaleofanew stockorbondissue.Thisistypicallydonethroughasyndicateofsecuritiesdealers.Theprocessof sellingnewissuestoinvestorsiscalledunderwritingInthecaseofanewstockissue,thissaleisan initialpublicoffering(IPO).Dealersearnacommissionthatisbuiltintothepriceofthesecurity offering,thoughitcanbefoundintheprospectus.Primarymarketscreatelongterminstruments throughwhichcorporateentitiesborrowfromcapitalmarket.
Featuresofprimarymarketsare:
Thisisthemarketfornewlongtermequitycapital.Theprimarymarketisthemarketwherethe securitiesaresoldforthefirsttimeThereforeitisalsocalledthenewissuemarket(NIM) Inaprimaryissue,thesecuritiesareissuedbythecompanydirectlytoinvestors. Thecompanyreceivesthemoneyandissuesnewsecuritycertificatestothe
CapitalMarketEssay
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Bourdieuarguesthatcapitaliswhatmakes"thegamesofsociety"morethanjustasimplegameof chance(Bourdieu1986:241).Itistheenergythatdrivesthedevelopmentofafieldthroughtime (Grenfell2008).Bourdieudoesnotrestrictcapitaltoitseconomicsense,however;heexpandsthe concepttoothernon–economicforms.Bythisexpansion,Bourdieushedlightonotherformsof capitalwhichareseenasdisinterestedandpurposeless(Bourdieu,1986)AccordingtoBourdieu (1986),theformsofcapitalareeconomiccapital(money,otherfinancialresourcesandmaterial assets),socialcapitalreferstosocialnetworksandcontactsoftheindividual,culturalcapitalisthe educationandknowledgeandthesymboliccapitalisthestatusshowmorecontent whenitisknownandrecognisedasself–evident".Itisthemostauthoritativecapitalforan individual(Bourdieu,1986).Itisasourceofpowersuchassocialagent'sprestigeorsocialhonour, etc.(Wolf,2002).Unlikeotherformsofcapitals,symboliccapitalcanbegainedonlythrough recognitionbyothers(Bourdieu,1986).Forexample,TheEpicofGilgameshisanepicpoemfrom ancientMesopotamiaItisoftenregardedasthefirstgreatworkofliteratureThelatestandmost completeversionyetfound,composednolaterthanaround600B.C.,wassignedbyaBabylonian authorandeditorwhocalledhimselfSin–Leqi–Unninni.TabletXIofGilgameshwasfirsttranslated intoEnglishandpublishedin1872.Thefirstcomprehensivescholarlytranslationtobepublishedin EnglishwasR.CampbellThompson'sin1930.Inaddition,ithasbeentranslatedintotoomany languagesItsArabictranslationwastranslatedbytheformerPresidentandCEOofSaudiAramco, AbdullahS.Jum'ah.Heobtainedtheexclusiverightsfromthepublisher"Penguin"totranslatethe epicintoArabic.LastyearinDammam,theCulturalandArtsAssociationorganisedaneventwhich openedwiththetheatreproductionoftheepicandafterwardsthetranslatorsignedagreatmany copiesofhis ...Getmorecontent...
BourdieuSocialCapitalDefinition
Whoisresponsibleforourcountryinthefuture?OutsidetheunfortunatechoicebetweenDonald TrumporHillaryClinton,whoelsewillcontinuetoleadthisnation?Childrenarealwaysseenasthe adultsoftomorrowWealwayshopethatthechildrenweraiseandteachwillimprovenotonlytheir livesbutthelivesofothers.Achild'scomprehensioncanbeaffectedbyeverythingaroundthem,so wemustprovidethemaneducationandthehelptheyneedtobecometheAmericaoftomorrow. PutnamsaysSocialCapitalishighlyinfluentialinachild'sdevelopmentPutnamalsosuggeststhat statesthathaveahighersocialcapital,oracommunitywhosecitizens"trustotherpeople,join organizations,volunteer,vote,andsocializewithfriends–...showmorecontent...
Onegroupofscholarsstudiedfamilylifepertainingtowardsneighborhoodsandparticularfamilyas well.Throughthesestudiesmanypsychologistsrecognizedthechangeinchildabuse.Childabuse wouldtendtobehigherinneighborhoodswithlowadherencewhilstbeinglowerinareaswhere citizensweremorecomfortablewithhavingtheirchildrenstaywiththeirneighborsoraskingthe neighborsforhelp.AnotherstudyleadbyDesmondK.Runyanandhisassociatesconcernedagroup ofchildrenwhowerehadahighriskofneglectandabusefromtheirparentsAfteracoupleofyears 87%ofthechildreninvolvedwiththestudywere"sufferingfrombehavioralandemotional problems"Thescholarsmadeapredictionthatthechildrenwhowerenotaffectedhad"thedegree towhichtheyandtheirmotherswereenmeshedinasupportivesocialnetwork,livedinasocially supportiveneighborhood,andattendedchurchregularly.".Overall,therehavebeenmany experimentsthatlinksocialcapitalandtheroleofparentswiththeirkid'slifeandthedevelopment thechildgoesthroughgrowingup.Thesefactorswillmakeamomentousdifferenceinthelifeofthe childthusshowingtheimportanceparents,teachers,leaderandgovernmentofficialshaveinthe futureofAmerica.(Putnam
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CapitalBudgetingEssay
CapitalBudgetingIntroductionCapitalbudgetingistheprocessofevaluatingandselectinglong–terminvestmentsthatareconsistentwiththefirm'sgoalofmaximizingownerwealth.Afirmusing capitalbudgeting,theirgoalistoseeiftherefixedincomewillcoveritselfforprofit.Fixedincomes arethingssuchasland,plantandequipment.Whenafirmusingamachinetoproduceitsgoodor serviceTheymostofthetimewhatthemachinetoproducetheamountthattheypaidforthe machineandmore.Thecapitalexpenditureistheoutlayoffundthatafirmexpectstoproduceand benefitwithinaoneyear.TheCapitalBudgetingProcessWhenapproachingtheproblemoftrying tothemeasurecapitalbudgetingThefirststepshowmorecontent
=53,742GlobalCapitalBudgetingIntheinternationalbusinessworldfirmsalsousetheCapital budgetingprocess.Whenenteringintotheinternationalmarketthereacoupleofthingthatare measureddifferent.TheFirstthingisthecashoutflowsandinflowsthatoccurinforeigncurrently Companiesfacelong–termandshort–termcurrencyriskrelatedtoboththeinvestedcapitalandthe cashflowsresultingformitTheSecondthingistheforeigninvestmententailpotentiallysignificant politicalrisk.Politicalriskscanbeminimizedbyusingbothoperatingandfinancialstrategies.
TECHNOLOGYWhendiscussingcapitalbudgeting,onemustincludetheeffectsoftechnology. Technologyassessmentcansupportthecapitalbudgetingprocessbyprovidingkeyinformationfor makingdecisionsaboutcapitalrequests.Technologyassessmenthasbeendefinedasamethodfor evaluatingtheeffectivenessofequipment,drugs,andclinicalprocedures(e)However,intermsof capitalequipmentplanning,technologyassessmentcanbedefinedmorebroadlyasamethodof evaluatingcurrentandrequestedcapitalequipmentbyconsideringtheresultsofpublishedclinical investigationsandofphysicalassessmentoftheequipmentinthedecision–makingprocess Technologyassessmentprovidesinformationfordecisionmakinginthreeareas.Thedepartment's equipmentneeds.Informationaboutadepartment'sneedsmightincludethe
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IntegrativeProblemandStudyQuestionsMarkCamagongFIN370January20,2010ArtPhilibert Week4AssignmentIntegrativeProblemandStudyQuestions1.Whyisthecapital–budgeting processsoimportant?Capitalbudgetingdecisionsinvolveinvestmentsrequiringlargecashoutlays atthebeginningofthelifeoftheprojectandcommitthefirmtoaparticularcourseofactionovera relativelylongperiodoftimeAssuch,theyarecostlyanddifficulttoreverse,bothbecauseof:(1) theirlargecostand(2)thefactthattheyinvolvefixedassets,whichcannotbeliquidatedeasily.2. Whyisitdifficulttofindexceptionallyprofitableprojects?Itishardto...showmorecontent... Onlybyexaminingcashflowsareweabletocorrectlyanalyzethetimingofthebenefitorcost Also,weareonlyinterestedinthesecashflowsonanaftertaxbasisasonlythoseflowsare availabletotheshareholder.Theincrementalcashflowsinterestusbecause,lookingattheproject fromthepointofthecompanyasawhole,theincrementalcashflowsarethemarginalbenefitsfrom theprojectand,assuch,aretheincreasedvaluetothefirmfromacceptingtheproject.10–4.How dosunkcostaffectthedeterminationofcashflowsassociatedwithaninvestmentproposal?When evaluatingacapitalbudgetingproposalweareinterestedinonlytheincrementalafter–taxcash flowstothecompanyasawhole.Regardlessofthedecisionmadeontheinvestmentathand,the sunkcostswillhavealreadyoccurred,whichmeansthesearenotincrementalcashflows.Therefore, theyareirrelevant.10–6.Whatarecommonreasonsforcapitalrationing?Iscapitalrationing rational?TherearethreeprincipalreasonsforimposingacapitalrationingconstraintFirst,the managementmayfeelthatmarketconditionsaretemporarilyadverse.Thesecondreasonisa manpowershortage,thatis,ashortageofqualifiedmanagerstodirectnewprojects.Thefinalreason involvesintangibleconsiderationsWhetherornotthisisarationalmovedependsupontheextentof therationing.Ifitisminorandnon–continuing,
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CapitalBudgetPaper
CapitalOneFinancialCorporation
1.HowisCapitalOne'suseofITdifferentfromothermasscustomizationstrategies?CapitalOne usesITthroughitsinformation–basedstrategy(IBS)to"record,organize,andanalyzedataonthe characteristicsandbehaviorsoftheircustomers,"asstatedbyCEORichardFairbankTheir philosophywastoexploitinformationbyconstructingscientificmodelsthatcouldbeusedtoboth assessthecreditworthinessofpotentialcardholdersthroughFICOscoring,andtocustomizeproduct offeringsforexistingonesThiswasdonethroughdatamining,sorting,customizingoffersand marketingcampaigns,andthenanalyzingthisdatatoseewhatcampaignsworked–forwhatreason andwhatshowmorecontent
Behavioralinterviews,caseinterviews,andstandardizedtestswereusedtofindrawtalentwithout focusingonpriorindustryormarketingexperience.ThesefourthingsarewhatseparatesCapital Onefromitscompetition,andwillsustaintheircompetitiveadvantageinthefuture
3.WhataretheconsequencesofCapitalOne'sITstrategyforexpansionintodifferentsegmentsof thecreditcardindustry,andintootherindustry's?Theimmediateconsequencesoftheirexpansion strategyprovedtheefficiencyoftheirstatisticalmodelingtoinhibitCapitalOnefromtakingany misstepsintoindustry'sthatareeithersaturatedordonotallowenoughgrowthinthefutureCapital Oneconsideredexpandingintoautoinsuranceandautofinancing,butfiercecompetition,low margins,andstringentregulationkeptthemfrompursuingthisimmediately.(CapitalOnedid recentlyacquireSummitAcceptanceCorporation–anautofinancingcompanythatfocusedonthe sub–primemarket).Nexttheylookedattheenergyandtelecomindustries,butconsumerenergy usagepatternsareavailablepubliclywhichkeptthemfromexploringthisoptionfurther.America OnewascreatedwhichresoldblocksofcallingtimeenablingCapitalOnetogainafootholdin telecom.AnancillaryeffectofCapitalOnelookingtobroadenitshorizonsintootherindustrieswill promoteothercompaniestoreviewtheircurrentITsystemstoseewheretheirinefficiencieslie,so theycan
CapitalOne
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Introduction
Therelationshipbetweencapitalstructureandfirmvaluehasbeendiscussedfrequentlyinthe literaturebydifferentresearcheraccordingly,inboththeoreticalandempiricalstudies.Ithasalso beendiscussedthatwhetherthefirmhasanyoptimalcapitalstructurethathasbeenadoptedbyan individualfirm,orwhethertheproportionsofdebtusageiscompletelyirrelevanttotheindividual firmvalue.
Afirmcanchooseamixofthreemodesoffinancingi.e.issuingshares,borrowingfromthemarket anduseofretainedearningsTheratioofthismixoffundspurelydependsonthefirmandknownas optimalcapitalstructureofthefirm.Thisleadstothedifferentcapitalstructuretheories.These theoriesexplaintheirshowmorecontent
Limitedresearchworkexistsonthisarea,likeBoothetal(2001)studied10developingcountries includingPakistan.However,thisstudywasconfinedonlytotop100indexcompanies.Second studybyShahandHijazi(2004)wasanimprovementonthefirstoneasitincludedallnon–financialfirmslistedonKSEfortheperiod1997–2001.However,thesecondstudytoowasbasicin natureintermsofitsuseofpooledregressionmodelavoidingthefixedeffectsandrandomeffects models.ThepurposeofthisstudyistoextendtheworkofShahandHijazi(2004)byextendingthe sampleperiodi.e2001–2006andincludingmorefirmsinsampleasconvenientrandomselectionof samples,usingrelevantmodelsofpaneldataandusingmoreexplanatoryvariables ThisstudywillfurtherleadtothedynamicsofKSElistedfirms.Investortrendstowardshighly leveragedfirmsanddeterminationwhethertheoptimumcapitalstructureeffectsthedecisionof investorresultingchangeinthebalancesheetofacompany
ObjectiveoftheStudy
Theobjectiveofthisstudyistocheckwhetherthechangesinstructureofcapitalhasimpactonthe overallvalueofthefirms,andspecificallyinleverageratiooffirmslistedinKarachiStock Exchange(KSE)
LiteratureReview
ThissectionstartswiththetheoryofirrelevancyofcapitalstructureFollowingsubsectionsgivethe overviewoftheoriesthatsuggestthatthecapital
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EssayonCapitalStructure
InThomasPicketty'sbookCapital,hequestionstheabilityofcapitalismtoremaintheprevailing economicsysteminthiscountry.Between1945–1975capitalismproducedasystemwereincomes ofthemassesbegantoconverge.Itwasaperiodwerealmosteveryonewastoenjoyandreapthe benefitsofthecapitalisticsystem.Howevernowthatperiodseemsmorelikeanaberration,thana trendWithratesofinequalitiesrising,andeconomicgrowthslowing,somehavewonderwhetheror notcapitalismisdoomed.PrevioushistoricalexamplessuchastheFrenchRevolution,haveshown usthatthemasseswillnotsubjugatethemselvestoasystemthattheybelieveisunfairandunequal.
Today,capitalismhasseemedtoreachthetippingpoint,whereweshowmorecontent Aswebegintoelectmoreandmoreleftofcenterpoliticians,thepoliticalmandatewillchange. Currently,manybelievethatthegovernmentjustservestheagendaoftheelite.Howeverifthe believesofthepeoplechange,sotoowillthepoliticianstheywillelect.Thepeoplewillbeginto pushforhigherstandardsofliving,andacloseintheinequalitygap.Thewayournewgovernment willtacklethisisthroughredistributionTheywilltakeprivatemoneyandfunditintohigher minimumwage,publicpensions,freehighereducation,andotherprogramsaimedatgiving everyoneabetterlife.Thesepolicieswillbefundedbytheprogressivetaxesoncapital,andincome. Thisseemsmuchmorelikelythanwarandconflictbecauseultimatelywhatpeoplewantismore equalitywithinthesystem.Thebestwaytoachievethisisthroughdemocraticpracticessuchas electionsHoweverthisprocesswillnotbeeasyTherearemanyhurdlestoovercomeinordertofix thewoesofcapitalismandimplementtheseprograms.IntheGreatDepressiontheUnitedStates succeededinimplementingmanyprogressiveprogramsthatultimatelyhelpedleadthecountryout ofthedepressionandintotheGoldenAgeHoweverthatwasattimewhenthegovernmentwas muchsmaller."InthewakeoftheDepression,WorldWarII,andpostwarreconstruction,itwas reasonabletothinkthatthesolutiontotheproblemsofcapitalismwastoexpandtheroleofthestate andincreasesocialspendingasmuchasnecessary.Today'schoicesarenecessarilymorecomplex. Thestate'sgreatleapforwardhasalreadytakenplace"(Picketty334).Weneednewapproachesin ordertotackleourissueToday'ssocietyismuchdifferentthanthesocietyFDRfacedintheGreat Depression.Incomeswererising,whichledtoagreateracceptanceoftaxdollarsgoingtothese social
ThomasPickettyCapitalism
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!!!WhatIsCostOfCapital?HowmuchwillitcostandwhatwillIgetfromit?Thesequestions oftenariseaboutmostthingsinlife.Investmentsarenodifferent,thecostofcapitalrefersto thedebtorequityitwillcosttofinanceaninvestment.Costofcapitalalwaysdependsonthe methodoffinancingused.Aninvestmentcaneitherbesolelyfinancedthroughequityordebt; mostlyitisacombinationofbothTherearemanysourcesofcapital,suchascommonstock,bonds, long–termdebt,etc.AfirmscostofcapitalismeasuredbyusingwhatiscalledWeightedAverage CostofCapitalorWACC.WACCistheaverageamountaninvestorexpectstoreceivefroman investmentInvestorsoftenuseWACCtodeterminewhethertoinvestExample:CompanyA hasthefollowingvalues:E=500,000(Marketvalueofthecompany'sequity)D=200,000(Market valueofthecompany'sdebt)V=900,000(TotalMarketValueofthecompany)Re=.07(Costof Equity)Rd=.03(CostofDebt)T=.30(TaxRate)WACCFormula=((E/V)*Re)+[((D/V)* Rd)*(1–T)]WACC=(($500,000/$900,000)x.07)+[(($200,000/$900,000)x.03)*(1–0.30))]
CalculatingWACCcanbetimeconsuminganddifficult,usuallyonewouldhavetocalculateeach componentusedintheformula.Flotationcostisapartofcalculatingcostofcapital,letsreview exactlywhatflotationcostisandhowtocalculateit.!!!FlotationCostFlotationCostareallthe expensesthatacompanywillgainwhen
CostOfCapitalAndCapitalEssay
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CapitalExpenditureBudget
IfIwasgoingtoprepareacapitalexpenditurebudgetrequesttoaddaretailpharmacyinthe hospitalmyfirstchoiceoftwoindividualsIwantonmyteamisthemanageroverthehospital currentpharmacy.Theywouldhavegeneralknowledgebasedonthehospitalpatientswhatillnesses andmedicinesarecommontodealwithandgiveusavaluableperspectiveoncosts,spaceand displaysInourtext(Smith,2014)"Themanagerofthehospitalpharmacycancontrolthenumber ofpharmacistsandtechniciansemployedrelativetopatientvolumeandtechniciansemployed relativetopatientvolumeandtheexpenseforthemanagementofthepharmacy.AllofthefactorsI mentionedisimportantwithestablishingacapitalexpenditurebudgetTheother ...Getmorecontent...
FinancialCapitalStructureEssays
Contents:
IntroductiononCapitalStructure
SummaryandEvaluationofArticles
Conclusion
References/Bibliography
IntroductionOnCapitalStructure:–
Inthefieldoffinancecapitalstructuremeansawayanorganizationorfirmsfinancestheirassetsby thewayofsomemixandmatchofEquity,DebtorHybridSecurities.
ThemodernthinkingoncapitalstructureisbasedontheModigliani–Millertheoremgivenby FrancoModiglianiandMertonMillerThetheoremsuggeststhatinaperfectmarketthetotalvalue ofthecompanyremainsthesamedependinguponhowisthatcompanyfinanced.Thistheorem provestheimportanceofcapitalstructuringbythefirmsthroughouttheglobe.Thereareother reasonsaswelllikebankruptcyshowmorecontent
Thecorporateleveragesareaffecteddirectlyandindirectlybycountry–specificfactors.The researchesincomparingthedifferentcapitalstructurearoundtheglobestartedaroundpastdecade orsoand[RajanandZingales,1995]didtheinitialcomparisonofsevenadvancedindustrialized countries.Theycameupwitharemarkablediscoverythatininfluencingafirm'scapitalstructure notonlyfirm–specificfactorsbutalsocountry–specificfactorsplayavitalrole[Demirgüç–Kunt andMaksimovic,1999]cameupwithadifferentconceptofcomparingcapitalstructureoffirmsin developedanddevelopingcountries.Theysuggestedthatinstitutionaldifferencesbetweensuch countriesshowahugevariationinlong–termdebt.Latestresearchesby[GrahamandHarvey, 2001],[BancelandMittoo,2004]and[Brounen,etal.,2006]havesuggestedthatevenamong developedcountrieslikeUSandEuropeancountriestheinstitutionalenvironmentandinternal operationsinfluencesfinancialpoliciesandmanagerialbehavior.Thisarticlebasicallyemphasison directimpactofcountriescharacteristicsonleverage.Byanalyzing10developingcountries,[Booth, etal,2001]foundthatcapitalstructureinsuchcountriesareaffectedsimilarlyasindeveloped countriesbutwithadifferenceinthewayleverageisaffectedbycountry–specificfactorslikeGDP growthandcapitalmarketdevelopment
Theotherarticlerelatingtocapital
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RaisingCapitalitoneofthemostimportantthinginanybusiness.It'suselesshavingagreatidea andtherightconnectionsifyoudon'thavethemoneytogetitgoing.Withoutcapital,yourbusiness can'tgetofftheground.Youneedittobuyproductsormaterials,paywages,haveasecurecash flowandgenerallyrunyourbusinessonaday–to–daybasis.Themostcommontypesofdebtcapital arebankloans,personalloans,bondsandcreditcarddebtWhenlookingtogrow,acompanycan raisefundsbyapplyingforanewloanoropeningalineofcredit.Thistypeoffundingisreferredto asdebtcapitalasitinvolvesborrowingmoneyunderacontractedagreementtorepaythefundsata laterdateWiththepossibleexceptionofshowmorecontent
Entrepreneurshipisoneofthehardestinvestmentstomakebecauseitrequiresmorethanjust money.Consequently,itisalsoanownershipinvestmentwithextremelylargepotentialreturns.By creatingaproductorserviceandsellingittopeoplewhowantit,entrepreneurscanmakehuge personalfortunes.BillGates,founderofMicrosoftandoneoftheworld'srichestmen,isaprime example
1.3PreciousObjects
Gold,DaVincipaintingsandasignedCristianoRonaldojumperareallconsideredasownership investment–providedthattheseareobjectsthatareboughtwiththeintentionofresellingthemfora profit.Preciousmetalsandcollectiblesarenotnecessarilyagoodinvestment,buttheycanbe classifiedasaninvestmentnonethelessLikeahouse,theyhaveariskofphysicaldepreciation (damage)andrequireupkeepandstoragecoststhatcutintoeventualprofits.
2.LendingInvestments
LendinginvestmentsallowyoutobethebankTheytendtobelowerriskthanownership investmentsandreturnlessasaresult.Abondissuedbyacompanywillpayasetamountovera certainperiod,whileduringthesameperiodthestockofacompanycandoubleortripleinvalue, payingmorethanabond–oritcanloseheavilyandgobankrupt,inwhichcasebondholders usuallystillgettheirmoneyandthestockholderoftengetsnothing.
21You'reSavingsAccount
Evenifyouhavenothingbutaregularsavingsaccount,youcancallyourselfaninvestor.Youare ...Getmorecontent...
EssayOnRaisingCapital
CapitalBudgetingThecityengineerspresentedcitycouncilmemberswithtwoprojectsthatrequire largecapitaloutlays.However,theeconomicdownturnmakesimplementationofbothprojects impossiblewithcurrentbudgetrestraints.Therefore,thecitycouncildecidedtoconductacost benefitanalysistodeterminethemostcosteffectiveproject.Whileneitherprojectmetallthe requirements,dataanalysisdeterminedthatOptionBwasthebestchoiceHowever,cityengineers pushedbackstatingthatbothprojectsarevitaltothecity.Consequently,itwasnecessaryto consideranalternativesolution.Theproposalbelowprovidesadetailedexplanationofalloptions includinganalternativesolution
Explanation:OptionAand...showmorecontent...
ThenewcapitalcostforOptionAis$–3,580,000.00andforOptionBis$–3,150,000.00.Thenet presentvalueforOptionAwithadiscountrateof12percent,capitalcostof$–3,580,000.00,and benefitsgeneratedanegativenetpresentvalue.WhileOptionBwiththecapitalcosts$–3,150,00000,adiscountrateof12percentandbenefitsequaledanetpresentvalueof$763,12200 ProjectJustification:OptionBWhileneitheroptionmeetsallthecriteria,OptionBisthemostcost–effectiveandefficientoptionofthetwo.Additionally,OptionB'shigherinternalrateofreturnof nineteenpercentprovidesthebestre–investmentopportunityforthefuture.Researchshowsthatthe internalrateofreturn"isandhasbeenapopularmeasureofworthforpurposesofproject evaluationItdefinesthereturnachievedbyaninvestment(ortruecostofaloan)andcanoftenbe viewedasameasureofefficiency"(Hartman&Schafrick,2004,p.139).Additionally,OptionBhas apositivenetpresentvalue,whileOptionAhasanegativenetpresentvalue.Inaddition,the paybackperiodforOptionBisfiveyearsandthepaybackperiodforOptionAis7475yearsIn addition,thepaybackperiodforOptionBisoutsidethecitycouncil's2.75yearsrequirement.The longpaybackperiodshouldnotdisqualifyOptionBfromcitycouncilmembers'decision–making process.Empiricaltestsshowthat"thenetpresentvaluemethodisusuallyabetterguideinthe
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EssayCapitalBudgeting
CapitalStructuretheories
CapitalStructureTheories
CapitalStructure
CapitalStructureistheproportionofdebt,preferenceandequitycapitalsinthetotalfinancingofthe firm'sassets.Themainobjectiveoffinancialmanagementistomaximizethevalueoftheequity sharesofthefirm.Giventhisobjective,thefirmhastochoosethatfinancingmix/capitalstructure thatresultsinmaximizingthewealthoftheequityshareholdersSuchacapitalstructureiscalledas theoptimumcapitalstructure.Attheoptimumcapitalstructure,theweightedaveragecostofcapital wouldbetheminimum.Thecapitalstructuredecisioninfluencesthevalueofthefirmthroughits costofcapitalandcanaffecttheshareoftheearningsthatpertaintotheequityshowmore content...
Thisapproachalsosaysthattheoverallcostofcapitalisindependentofthedegreeofleverage
FeaturesofNOIapproach:
1.Atalldegreesofleverage(debt),theoverallcapitalizationratewouldremainconstant.Fora givenlevelofEarningsbeforeInterestandTaxes(EBIT),thevalueofafirmwouldbeequalto EBIT/overallcapitalizationrate.
2.Thevalueofequityofafirmcanbedeterminedbysubtractingthevalueofdebtfromthetotal valueofthefirmThiscanbedenotedasfollows:
3.Costofequityincreaseswitheveryincreaseindebtandtheweightedaveragecostofcapital (WACC)remainsconstant.Whenthedebtcontentinthecapitalstructureincreases,itincreasesthe riskofthefirmaswellasitsshareholders.Tocompensateforthehigherriskinvolvedininvesting inhighlyleveredcompany,equityholdersnaturallyexpecthigherreturnswhichinturnincreases thecostofequitycapital.
Example:
LetusassumethatafirmhasanEBITlevelof$50,000,costofdebt10%,thetotalvalueofdebt $200,000andtheWACCis125%Letusfindoutthetotalvalueofthefirmandthecostofequity capital(theequitycapitalizationrate).
Solution: EBIT
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ValueofEquity=Totalvalueofthefirm–Valueofdebt
Criticallyreflectontheimportanceofcapitalbudgeting.Whyisthisheatedsubjectinmany boardrooms?Howdoescapitalbudgetingpromotethefinancialhealthofanorganization?Howwill youusethefinancialtechniquesyouhavelearnedthisweektopromotethefinancialhealthofyour organization?
AcapitalbudgetisveryimportantforabusinessItisaheatedsubjectbecauseadecisionabout capitalbudgetingcanhelpthebusinesstodetermineiftheproposedinvestmentsorprojectareworth takingornot.Therearetwothingsthatabusinesshastotakeintoconsiderationwhenitismakinga capitalbudgetdecisionFirsttherearefinancialdecisionsthathavetobemadeSecond,thereisan investmentdecisionthatisalso...showmorecontent...
Ifthebusinesswastomakeaninvestmentonaprojectthatwasnotrightornotprofitablethesmart thingtodowouldbetonotinvestintheprojectorconsideritatall.Aninvestmentthatdoesnot makeanymoneycanbewastefulforthebusinessandmakeitlosealotofmoneyinthelongrun. Thatiswhyitisimportantforthosewhomakethedecisiontoevaluatealloftheiralternatives,risks, andreturns,etcinordertodecideonwhetherornottorejectoracceptaprojectthatitmighthavein mind.
Asaresult,topromotethefinancialhealthofanyorganizationoneshouldknowthepresentvalueof theinvestmentandhaveagoodidealofhowlongthatinvestmentwilltaketomatureandgiveback returnsInordertocreateacapitalbudgetIhavetoconsidertheneedsoftheorganization,lookat thefinances,goals,andpositionthatthebusinessis.IndoingIcouldmakeadecisionaboutthe needsofthatbusiness.Second,Iwouldhavetocollect,compare,analyze,andevaluatethecashand financialstatementsinordertocomparethecostandrevenueItwouldgivemesomeleadwayinto thepositionofthebusinesswhenitmovesforwardtothefuture.Third,thecapitalbudgetwould havetobecomparedtothecashflow,becauseitwillhelpmetoknowhowimportantitistomake theinvestmentonlyifitincreasesthefinancialbottomlineandincreasethetotalfinancial performanceofthebusiness.Icanusethe
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capitalbudget1