Optimal Capital Budget
Marginal cost of capital (MCC) plays a very important role in capital budget decision-making. When used in conjunction with the investment opportunity schedule, an optimal capital budget may be determined. Optimal Investment Decision The MCC of a company tends to…
The Marginal Cost of Capital
The cost of capital should ideally reflect the riskiness of the future cash flows of a project. For an average-risk project, the opportunity cost of capital is the same as the weighted average cost of capital (WACC) of the company….
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…
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…
Cost of Equity Capital
A company can increase its common equity either by reinvesting its earnings or issuing new stock. The cost of equity will, therefore, be the rate of return that is required by its shareholders. Three methods are used to estimate the…
Market Orders vs. Limit Orders
Market orders obtain the best price being offered in the market, so traders submitting marker orders are simply taking the market price. Limit orders will only buy below or sell above a given price. Suppose a trader’s limit order specifies…
Primary and Secondary Markets
The sale of securities by the issuer to investors occurs in the primary markets, while the sale of securities between private investors occurs in the secondary markets. Primary Markets Initial public offerings (IPO) describe the issuer’s first sale of a…
Quote-driven, Order-driven, and Brokered Markets
Quote-Driven Markets/Over-the-Counter (OTC) Markets In quote-driven markets, customers trade at prices quoted by dealers that generally work for commercial banks, investment banks, broker-dealers, or trading houses. Most trades in these markets are conducted through proprietary computer communications networks or by…
Characteristics of a Well-functioning Financial System
A well-functioning financial system has complete markets with effective financial intermediaries and financial instruments allowing: Investors to move money from the present to the future at a fair rate of return; Borrowers to easily obtain capital; Hedgers to offset risks;…
Objectives of Market Regulation
The objectives of market regulation are to control fraud, control agency problems, promote fairness, set mutually beneficial standards, prevent undercapitalized financial firms from making excessively risky investments, and ensure that long-term liabilities are funded. Control Fraud: Market regulators put systems…