Company’s Capital Structure over its Life Cycle
The maturity, capital intensity, market position strength, and the stability and nature of a company’s operation are all elements that influence its capital structure and ability to support debt. As a general rule, companies begin as capital consumers, that is,…
Flotation Costs Explained
Flotation costs are expenses that a company incurs during the process of raising additional capital. The value of these flotation costs is related to the amount and type of capital being raised. When a company raises debt and preferred stock,…
Cost of Noncallable, Nonconvertible Preferred Stock
A preferred stock that does not give its holder the right to convert their preferred shares into a fixed number of common shares, usually after a predetermined date, is called a nonconvertible preferred stock. A noncallable, nonconvertible preferred stock is…
Calculating Cost of Debt Capital
The cost of debt is the cost of financing a debt whenever a company incurs a debt by either issuing a bond or taking a bank loan. Two methods for estimating the before-tax cost of debt are the yield-to-maturity approach…
Capital Allocation Pitfalls
Here are some of the most common mistakes managers make when evaluating capital allocation decisions: Not Incorporating Economic Responses into the Investment Analysis Failure to incorporate economic responses into investment analysis can greatly affect the profitability of the investment. Attractive…
Real Options Relevant to Capital Investment (2022)
Options are financial derivatives that give buyers the right, but not the obligation, to buy or sell an underlying asset at an agreed-upon price and date. Likewise, real options are capital allocation options that allow managers the right, but not…
Relationship between Company’s Investments, Value, and Share Price
Projects which have a positive NPV should, in theory, increase the value of a company as well as the value of its stock. This could help explain the popularity of NPV as a capital allocation evaluation method. Relationship among NPV,…
Capital Allocation
Capital allocation describes the process companies use to make decisions on capital projects, i.e., projects with a lifespan of one year or more. It is a cost-benefit exercise that seeks to produce results and benefits which are greater than the…
Short-term Funding
The objectives of a short-term borrowing strategy include: Master short-term funding concepts with our Free Trial. Several factors will influence a company’s short-term borrowing strategies: Start Free Trial → Master short-term funding sources, financing choices, liquidity management, and working capital…
Measuring Liquidity
A company’s liquidity is measured by the extent to which it has current assets, i.e., cash, marketable securities, accounts receivable and inventory which can be readily used to satisfy its short-term obligations. Measuring Liquidity Liquidity ratios assist in measuring the…
