Daniel Joseph
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Stories (53/0)
Raising Equity Capital
Equity capital enjoys only one significant advantage over borrowed capital, but for some this advantage outweighs all the other drawbacks: Equity capital is permanent capital; it need not ever be repaid. However, whenever your company accepts this permanent capital, it will, in effect, also be accepting a partner who will share in the fortunes of the firm from thereon. Therefore, before management decides that the equity market is a good idea, it should first answer a fundamental question: Is the permanent nature of the new capital that will be raised worth the dilution of control that may go with it? There are four distinct financing methods. Management can (1) seek out a venture capitalist; (2) raise the money through private investors; (3) try private placement through an institution or investment bankers; or (4) plan a public offering. For the nonfinancial manager who is considering starting a business of her own, the second section is particularly important: Private investment funds have been the source of money for hundreds of successful start-ups.
By Daniel Joseph 2 years ago in Journal
Dealing With an SBIC
Small business investment companies (SBICs), a specialized form of venture capital firms, have become an important source of capital. SBICs are licensed by the federal government to fill a financ¬ing gap for small business. SBICs can borrow up to four times their private capital position from the U.S. government at favorable borrowing rates. Most SBICs attempt to cover only operating expenses on loans, with profits coming from equity participation. Thus, the interest-rate spread is narrow.
By Daniel Joseph 2 years ago in Journal
Regulation D Private Placement
Small and midsize companies are increasingly using private placements as fund-raising vehicles, thanks to a 1982 streamlining of the rules known as Regulation D. In a private placement, stocks or bonds are sold directly to an institutional investor or a small group of institutional investors. Regulation D is specifically directed toward opening up the huge private placement market. In several ways, the regulation can help a small business raise capital through a private placement. First, Regulation D increases the amount of capital that can be raised under various categories. Under the smallest classification (Rule 504), you can raise $500,000 in 12 months versus $100,000 under the former rule.
By Daniel Joseph 2 years ago in Journal
Raising Capital Through a Public Stock Offering
A public stock offering is probably the most complicated of the four ways to raise equity capital. Using this method means generating scads of paperwork to satisfy SEC rules. With that in mind, here are capsule descriptions of the four types of public stock registration open to your company: S-1 offerings. This is the general filing registration required by the SEC and is rarely suitable for smaller companies. It requires maximum disclosure for both the offering and later statements. This can be extremely demanding and costly.
By Daniel Joseph 2 years ago in Journal
Using Internal Rate of Return
The internal rate of return (IRR) evaluation method is akin to net present value because it is also based on the discounted cash flow principle. When using NPV, however, you always assign a discount rate. In the IRR method, you derive a discount rate through trial-and-error calculation. The IRR method attempts to determine the internal rate of return of a proposed capital investment by calculating the discount rate needed to bring the NPV to zero. Then, if the calculated rate of return is greater than the average cost of capital, the project is acceptable. If not, the project is rejected.
By Daniel Joseph 2 years ago in Education
Using Net Present Value to Measure Return
If your company has not yet used the net present value (NPV) method of measuring the rate of return on a proposed capital investment project, chances are good that it will do so in the near future. During the past several years, NPV has become one of the most commonly used methods of capital investment evaluation.
By Daniel Joseph 2 years ago in Education
What Are Equity Costs?
Company managers generally view equity capital as cost free. Theoretically, you do not have to pay the capital back, so it’s free, particularly if your company does not intend to pay dividends that year. From a stockholder’s viewpoint, however, the outlook is different. Every dollar of earnings retained in the firm is a dollar denied to the stockholders. In a sense, it is a “hidden” cost for stockholders, almost akin to a new investment in the firm. The reason that stockholders maintain their investment is the promise of future dividends and/or capital appreciation (that is, an increase in share prices). Since both dividends and share price improvement depend on future earnings per share, it is the most important factor in determining your equity costs.
By Daniel Joseph 2 years ago in Education
Avoiding Common Pitfalls
No system for allocating capital resources is foolproof. You can, however, cut down on your chances of making a mistake by exploring the following alternatives when planning your capital investment proposal: ● Look for something better. Resist the tendency to assume that the proposals that bubble up from your subordinates are the best available. To strengthen your planning, solicit ideas from the widest possible range of departments. ● Be ready to branch out. Another common failing is the tendency to concentrate on the familiar when seeking fund allocations. Too often, innovative programs are equated with risky pro¬grams, and therefore disregarded. Always be ready to accept change if a sound business case can be made for it. ● Look to the longer term. In many firms, projects with a short payback period get the inside track. Management tends to think in terms of current-year results and overlooks projects that promise only long-term profit opportunities. However, the primary purpose of capital investment is to ensure the long-term profitability of your firm. Thus, while short-term profits are important, always leave room for projects that will pay off over the longer term—and be prepared to argue for them. ● Follow up on your capital program. Once a project has been approved, make an effort to ensure that it meets stated objectives. This will assist you in spotting problems early on and enhance the effectiveness of the program.
By Daniel Joseph 2 years ago in Education
Capital Investment Basics
Now that you have a handle on budget and cash flow, it’s time to move ahead with new projects. But first you must answer these questions: (1) Is there enough capital? (2) What projects will get priority? The best time—indeed, the only proper time—to make capital investment decisions is well before the actual funds are needed. Far too often, capital spending plans are made on a crisis basis, with the “squeaky wheel getting the most grease.” A slick presentation for someone’s pet project is no true basis for committing part of the firm’s financial resources, no matter how well intentioned that project may be. As a manager with decision-making authority, you need a long-term approach—a system that will enable you to analyze each proposal and then compare it with other possible projects.
By Daniel Joseph 2 years ago in Education
Bond Financing
Bonds are actually loans that people, like you and me, make to companies. In exchange for the loan money, companies issue bonds. The terms of the loan are set out in a written agreement called the bond indenture. This stipulates the interest rate that will be paid to bondholders and when the principal will be repaid. It also designates a trustee, who is responsible for seeing that the terms of the agreement are met.
By Daniel Joseph 2 years ago in Trader
Determining Flexible Hurdle Rates
When properly used, flexible hurdle rates can provide reasonable yardsticks for judging prospective spending proposals, and they also avoid the pitfalls associated with using a single hurdle rate. To apply flexible hurdle rates to your capital spending program, you will need to rate each proposal according to its degree of risk. High-risk proposals should require a relatively high rate of return to be acceptable; medium-risk, a somewhat lower return; and low-risk proposals, an even lower rate. Minimum-return standards for each risk category are based on assumed-risk capital costs. This approach involves three basic, relatively easy steps:
By Daniel Joseph 2 years ago in Trader
Capital Investment Risks Analysis
If you were given a choice between two projects with the same return, you almost certainly would choose the project with less risk. The higher-risk project could be justified only by a higher return. This is why you must make some provision for assessing the risk in a proposed capital project. Without knowing the risk, you are not in a position to judge whether the project is suitable. At the outset, you should recognize that risk analysis is a difficult job. No method of risk analysis is entirely satisfactory, and each requires a good deal of expertise and judgment on the part of management. Moreover, many risks are difficult to reduce to numbers. For this reason, you should regard the risk analysis methods discussed below as tools. They are not substitutes for sound business judgment. They do, however, force you to view the various projects in the same light, which highlights risk and permits you to compare all of them.
By Daniel Joseph 2 years ago in Education