Project #37058 - Finance

after capital investment. I know firsthand as the person responsible for the reporting, that the numbers were exaggerated, in value. By creating the value at an exaggerated view, the university stood a greater chance of looking successful, the state stood an even greater chance of getting buy-in from tax payers for investing their tax dollars in programs that would create jobs. The bad part was, the state never wanted “net”. They didn’t care if our programs created a 100 jobs one day, and the next only 1 job survived. The only presentation to the tax payers, was gross. This created a very high value in the community’s eyes for investing the largest sum of money into a collaborative grant, in the state’s history. Most of the grant money was for capital expenditures, and sadly many of those investments made were outdated by the time they were delivered. One camera was $4 million dollars. That was the first purchase order I wrote. And by the time I left 5.5 years later, the camera was just arriving.

So, while the initial investment was $28 million, from the state, the “value” returned was over $300 million in “economic impact”. For a firm to make an investment decision beneficial, the expected return on invested capital must be greater than the associated cost of capital. (Brealey, Myers & Allen, 2011)

 

Brealey, R.A., Myers, S.C., & Allen, F. (2011). Principles of Corporate Finance, Concise Edition, (2nd ed.). New York, NY: McGraw-Hill Irwin.

B.)

“The company cost of capital is defined as the expected return on a portfolio of all the company’s existing securities. It is the opportunity cost of capital for investment in the firm’s assets, and therefore the appropriate discount rate for the firm’s average-risk projects” (Franklin, Brealey, & Myers, 2012, p.214). Therefore, a company is bound to overestimate the value of high-risk projects if it uses its company cost of capital to evaluate projects. Assuming cash outflow is first, followed by cash inflows, we can assume that the discount rate used in the calculation of the net present value has a downward bias. This bias encourages the firm to accept high-risk project incorrectly.

Cost of capital is also considered as all monies used to fund in a business. However, it still depends on the mode of finance used and is often times blended to ensure more accuracy in decision making related to projects, this method is a bit more complicated and is often referred to weighted-average cost of capital or WACC (Cost of Capital, 2014). It is important to note that there are two main reasons why so much time is spent on estimating the company cost of capital: (1) projects can often times be treated as neither more nor less risky than the average cost of another company asset; also noted as an average risk; and (2) baselines for discount rates unusually risky projects. It is easier to manipulate and adjust company cost of capital than it is to estimate from scratch a project’s cost (Franklin, Brealey, & Myers, 2012). Thank you for reading.

REFERENCES
Allen, Franklin; Brealey, Richard A; Myers, Stewart C (2012-07-01). Principles of Corporate Finance, Concise, 2nd edition (McGraw-Hill/Irwin Series in Finance, Insurance and Real Estate) McGraw-Hill Higher Education -A. Kindle Edition.

Cost of Capital. (2014). Investopedia.com. Retrieved from http://www.investopedia.com/terms/c/costofcapital.asp

Part 2: In a minimum of 250 words, what are the most critical concepts involved with successful capital structure patterns? Can certain steps be overlooked? Why or why not?
Please make sure to use references. (I need this part completed no later than Tuesday at 6pm MST)

 

Part 3: Will be the same structure as part one, but different posts to respond to about a different topic. I will send these to you on Tuesday and need them no later than Friday at 6pm MST.

Subject Business
Due By (Pacific Time) 08/08/2014 06:00 pm
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