You should make original posts discussing any three of the following statements.

Question

You should make original posts discussing any three of the following statements.

If you were evaluating an investment opportunity, which technique would you use and why?

When evaluating investments, you can get data from engineering, marketing, and sometimes accounting. Do you think any of these organizations have internal biases? If so, as a member of the finance department, how would you deal with them?

You have just discovered that your boss favors payback in evaluating investments. Should you try to talk him out of it or should you go along with his/her desires?

You are comptroller for your company. The CEO is a savvy individual with great instincts for the business. She strongly favors an investment that is only marginally acceptable at best. She has asked you to put together a justification for it. What will you do?

Last year your company financed its investments by selling shares of common stock. This year the plan is to use debt. The after-tax cost of debt is 5%, the cost of equity is 12% and the weighted average cost of capital is 9.5%. The first investment for this year is an expansion project. What cost of capital will you use and why?

The weighted average cost of capital can consist of debt, preferred stock, and equity. Which of these sources is the most expensive and the least expensive and why?

Young companies usually finance their assets with equity. Why?

Equity financing can come from external or internal sources. Which of these is the least expensive and why?

Explanation / Answer

The weighted average cost of capital can consist of debt, preferred stock and equity. Which among these sources is the most expensive and the least expensive and why?

ans: the least expensive is debt , as debt is a cheap source of finance. there interest tax shield from debt , the interest paid on debt is tax deductible. in the event of liquidation, the debt holders gets paid first before the equity holders.

most expensive is equity, because equity holders get a share in the profits in the form of capital appreciation as well as dividends in the company.As equity investment carries the highest risk to the investor.

why do young compnaies use equity as a source of finance >

Young companies usually finance their company with equity : young companies/start up companies find it difficult to raise external source of capital in the form of debt because of their poor historical reocrd does not generate credibility. There credit history about the repaymnet structure of the dbet they have issued is not available, due to the unavailability of credit history. These companies raise equity instead of debt.

equity can come from external or internal sources of financing, which one is the least expensive and why?

internal source of funds is the least expensive, as this is internally available in the company in the form of reserves, profits , revenues and assets of the company. But sometimes the internal funds are not enough so the company when the requirement of funds is huge so the company may go for relatively expensive external source of financing. The cost of capital for internal sources of finance is pretty low, whereas the cost of capital for external source of finance is high. collateral is not required in internal financing.

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