Long Term Financing Alternatives
Shellie N Phillips, Elias Hernandez, and Deborah Stewart
University of Phoenix
March 19, 2008
Firms need Capital to finance their assets. The need for long-term capital requires the firm to assure itself of having adequate capital at all times. Financing can be debt based, equity based or a mix of both. Debt is the cheapest form of financing, but it should be used only within reasonable limits, because use of debt beyond a reasonable point may increase the firm’s financial risk and drive up the costs of all sources of financing. This paper discusses the concepts of capital pricing models, debt/equity mix and dividend policy, evaluates various long-term financing alternatives and characteristics and costs of financial instruments, which are helpful to a firm intending to expand in the future.
Capital Asset Pricing Model (CAPM) with the Discount Cash Flow Methods
What is the cost of capital and how is it measured, what is its price? In order to get an accurate price of what capital is costing the firm the liability must be weighed out against its benefit. If the cost out weighs the benefit then there would be a negative return. When discussing capital funds we must consider the vehicles in which capital is raised. There is a price for Bonds, Preferred Stock, and Common Stock. The cost of debt or simply the cost of financing is arrived to by the interest rate, or yield, paid to bondholders. Preferred Stock is quite comparable to the cost of debt, the payment is consistent every year; however, there is no maturity date on the principle. The cost of a preferred stock is simply determined by the dividend over the current price. The cost of Common Equity (Common Stock) is much the same except that it Current Dividend over Market price. There are some variations and other factors that can be considered in determining this cost. There is... [continues]
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