IEN255 Chapter 13 - Capital Budgeting Decisions

1
IEN255 Chapter 13 - Capital Budgeting Decisions

• Capital Budgeting - involves decisions related to
  fixed assets
• Capital Budgeting - the whole process
• Choice of financing, schedule of investment
  opportunities, and estimate of MARR

Budgeting!!!!
2
Methods of Financing

• Investment not independent of source of financing
• Equity financing
• use of retained earnings otherwise paid to
  stockholders
• issuance of stock
• cost associated with issue (flotation cost)
• raise capital to finance projects!

3
Example 13.1

• Solution only

4
Debt Financing

• Short term borrowing from banks (term loans)
• sale of long-term bonds (bond financing, includes
  floatation costs)

5
Example 13.2

• Solution only

6
Capital structure

• Debt Ratio (Capital structure)- percentage of
  total capital provided by borrowed funds
• Target Debt Ratio - firms desired ratio (if
  actual debt ratio is below target level, any new
  capital will probably raised by issuing new debt)

7
Cost of Capital

• Cost of equity - opportunity cost, rate of return
  for stockholders
• eqn bottom of 686

8
Cost of Retained Earnings

• all blue eqns on 687
• with flotation costs

(13.2)
9
Cost of Preferred Stock/Equity

• Preferred Stock
• equity

(13.3)
(13.4)
10
Example 13.4

• Solution only

11
Cost of Debt

• Specific cost of debt component

(13.5)
Blue part of 691
12
Calculating the Cost of Capital

• Weighted Average
• example 13.6

(13.6)
13
Choice of MARR

• One value is NOT always right
• If Project Financing Known
• page 694

14
MARR when financing unknown

• Depreciation Expenses under Inflation
• page 695 and 696

15
MARR under Capital Rationing

• Page 699 - comments

16
Capital Budgeting

• Terms (independent and dependent projects)
• Formulation
• Independent Mutually Exclusive
• table at top of 702 table middle of 702
• contingent table at bottom of 702

17
Capital Budgeting w/ limited budgets

• Solution a) on pg 704 and 705

18
Capital Budgeting w/ limited budgets

• figure 13.5 and table 13.5

19
IEN255 Summer99 Chapter 10,11,13 HW4

• Homework Assignment
• Chapter 10
• s 10.4 10.6 10.24
• Chapter 11
• s 11.1 11.6 11.13
• Chapter 13
• s 13.9
• Due together (Tues July 27)