Reference no: EM131107500

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Stock

1-Stocks simply put are the way business create cash flow by selling or buying stocks within their company. These stocks allow for investors to purchase stocks within a given corporation or company in hopes to make a positive gain on their future value. Each stock carries its own prices as the market adjust and monitoring when to buy stocks or to sell is as easy as saying buy low and sell high. This can be a bit tricky though since you may buy low when you think it is the lowest yet the market keeps going down. Stay the course and stay informed on how the company is doing through their prospectus and use that information to help with making informed decisions.

o Stock Valuation

2-Stock Valuation is somewhat of a simple way to say the price at which you purchase stock and then the value of the stock after dividends and the buyers price is sold for. The market constantly changes throughout the day and paying close attention to stocks and the price at which they are worth can in fact win you money if you have the time and effort to give in to it. There are times where the outcome is not always positive and that the market does a nose dive for instances in the most latest market debacle with the Brexit in the European Union. As so remember to stay the course as usually through decades of research and analytical statistics the market tends to bounce back so be carefully on making decisions irrationally.

Capital Budgeting Methods

3-Capital Planning is the process of budgeting for the long term. An organization must budget resources for the future of the company's long term goals and plans. It also can be known as capital budgeting and investment appraisal. The internal rate of return is the discount rate that produces a zero NPV. It is important to an organization because it tells which investments should be accepted and which should be rejected. If the IRR is less than the required rate of return, then the organization should reject the project or investment.

Optimal Cost of Capital

4- Policy, dividend policy, and investment policy. These three policies help arrange the company's ability to have control over each and make adjustment as needed. Unfortunately there are other uncontrollable factors that affect the cost of capital which are taxes and the level of interest rates. Optimal cost of capital allows for a business to be able to control its best debt to equity ratio to maximize its value. By minimizing the cost of capital and balancing the debt to equity a firm can succeed significantly with continually growing the business.

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5- Under circumstances that allow for a company to have to make a decision on whether to introduce new items such as machinery or replacement parts the company must weigh the cost of that item and the future outcome of whether they will maintain profitability throughout the duration of the assets lifespan. the internal rate of return on this asset is to prove that the output of the new asset out weighs the cost of the newly purchased equipment. Net present value is important to a project because it also has an effect as to whether the company should or should not purchase a new asset. Understanding the cost of the asset needs to be worth buying for future value of the output of the equipment itself.

6- The main elements in calculating the cost of capital are; debt financing, equity financing and hybrid equity. Debt financing is the company's liability and equity accounts. The equity financing is broken down by owner's equity, preferred stockholders, common stockholders and the retained earnings. Hybrid equity is preferred stockholders. An increase in debt will affect the cost of capital if it is a long term debt because the bank is now a creditor of the company. It also changes the income statement and interest expense related to the debt. The optimal capital structure for a company is one in which there is a balance between the debt to equity range and minimizes the company's cost of capital.

7- Most people see debt in a negative version because an increased use of debt increase the perceived risk (of bankruptcy) of a firm. A high level of debt/risk will also have a negative impact on stock price. Lenders (creditors) & bond investors will expect to be well compensated for bearing a higher risk by higher rate of return. This week's subject however informs us that a good use of debt can be a smart financial strategy.

But how so?

8- Another upside of debt financing is that a company will not dilute its shares of ownership. Are there any more advantages or concerns for debt financing in addition to risk and tax shield? Keep exploring.