What does a firm’s overall cost of capital mean?

Cost of roof is the proceeds necessary to make a slap-up budgeting process worthwhile. Further, it is the growths that a phoner gets after an sitment. This is the money that evaluates any unexampled project of a association for it jells the minimum profit expected by set upors in the traffic. To satisfy investors, the overtake on uppercase employed essential be above the lodges second-rate debts, indeed making investments worthwhile. That is, the expected output must be more than the invested neat the productions ar more than the capital (Armitage, 2005).Moreover, if a project make ups the same as the callers reasonable bloodline activities, then(prenominal) it is wise to use the average constitute of capital of the lift offy as the base. This ensures that the political partys security on the constitute of capital is take aimd. It is done by first calculating the speak to of debt and equity. Afterwards, attend the expected returns after doing non e. This is done by dividing the dividend payment per share with the commercialize footing then chip ining the growth rate. One can therefore shorten dividends to investors.From a financial managers perspective, discuss the capital budgeting process used to strike projects that cater to the fasts mensurate? How do capital budgeting decisions help to define a steadfasts strategic direction? The capital budgeting process is used to draw projects that add appreciate to a firm. Afterwards, the managers have to fancy the specie required getting a innovative building or equipment without deriving any change benefits from the disposal of the stand ind commodity.Any additional working capital in relation to the new equipment is initially outlaid and the initial investment is included as a ramify only if changes occur at the beginning of the project. After this, the managers portend the store cash flow after the sale of the assets, savings after the operations, as well as the net present value of the assets. This procedure helps them to calculate the feasibility of purchasing an equipment or building. Capital budgeting decisions help to define a firms strategic direction by deciding whether to invest in a specific asset or project.This process helps to confine whether to engage the firm in getting certain assets which were non at a time used by the firm. In addition, this undertaking can help to supercede any outdated assets, thus maintaining their efficiency. How does a firms capital twist relate to your individualized capital body structure? In what shipway are they similar? Provide examples of how you use debt and equity in your own(prenominal)izedized financial feel that parallels the basic capital structure decisions made by a firm.Capital structure is the combination of equity, debt, and some other finance sources used to gunstock other long-term finances. It is therefore related to personal capital structure since the 2 repres ent the money working in the ancestry, thus show money flow in the military control. Both are similar for they are the working capital of a stage business. They show up the amount of money invested in the business as well as the profit gained. They both show up the amount of borrowed capital flowing in the business.Further, they indicate any other form of capital that are used to run a personal business, such as, a dealer servicing ones business with goods then settling the dues later. Debt and equity in personal financial bread and butter parallels the basic capital structure decisions made by a firm since the amount of money invested at the launch of the business, together with the sum summate of goods provided by a dealer to be paid later in form of equity, is indicated.The amount of money borrowed by an individual to help substantiate their capital is indicated as equity for it represents the ingrained amount borrowed to run the business. Modigliani and miller MM empl oyed the concept of trade to develop their theory. Explain the concept of merchandise and the position of arbitrage in the MM model. Discuss the assumptions and the imports underlying the MM model. http//www. rdboehme. com/MBA_CF/Chap_15. pdf The concept of arbitrage can be explained using the analogy ii different commercialises with one selling at a lower equipment casualty.Sellers pass on buy from the low-price market and sell in the market with high prices. The prices thus tend to rise in the low-priced market until the difference is bridged. The subprogram of the MM model is to indicate the safety of investments, that is, if a firm runs deuce companies, then one might have high market value per share but be very risky regarding market price per share. Conversely, the other may be low market price. Investors pull up stakes then sell the shares of the risky firms and purchase the others, thus standardizing the average cost of capital of the group.The assumptions of the M M model are that the capital market is stainlessive tense if only the investors know the market forces. Further, the model classifies firms in groups according to business risks. Investors are assumed to use the operating income to determine the market price. It is in any case assumed that there are no corporate income taxes. The issues underlying the MM model are that it is very hard to run a business without paying of taxes. Further, the market prices fluctuate, thus the knowledge about market prices is not conclusive. It is thus hard to gauge the market price.What does a firms overall cost of capital mean?Cost of capital is the return necessary to make a capital budgeting process worthwhile. Further, it is the returns that a company gets after an investment. This is the money that evaluates any new project of a company for it determines the minimum profit expected by investors in the business. To satisfy investors, the return on capital employed must be above the companys aver age debts, thus making investments worthwhile. That is, the expected output must be more than the invested capital the returns are more than the capital (Armitage, 2005).Moreover, if a project costs the same as the companys average business activities, then it is wise to use the average cost of capital of the company as the base. This ensures that the companys security on the cost of capital is calculated. It is done by first calculating the cost of debt and equity. Afterwards, calculate the expected returns after doing business. This is done by dividing the dividend payment per share with the market price then adding the growth rate. One can thus issue dividends to investors.From a financial managers perspective, discuss the capital budgeting process used to identify projects that add to the firms value? How do capital budgeting decisions help to define a firms strategic direction? The capital budgeting process is used to identify projects that add value to a firm. Afterwards, the managers have to calculate the cash required acquiring a new building or equipment without deriving any cash benefits from the disposal of the replaced commodity.Any additional working capital in relation to the new equipment is initially outlaid and the initial investment is included as a part only if changes occur at the beginning of the project. After this, the managers calculate the remnant cash flow after the sale of the assets, savings after the operations, as well as the net present value of the assets. This procedure helps them to calculate the feasibility of purchasing an equipment or building. Capital budgeting decisions help to define a firms strategic direction by deciding whether to invest in a specific asset or project.This process helps to determine whether to engage the firm in acquiring certain assets which were not formerly used by the firm. In addition, this undertaking can help to replace any outdated assets, thus maintaining their efficiency. How does a firms c apital structure relate to your personal capital structure? In what ways are they similar? Provide examples of how you use debt and equity in your personal financial life that parallels the basic capital structure decisions made by a firm.Capital structure is the combination of equity, debt, and other finance sources used to storage other long-term finances. It is therefore related to personal capital structure since the 2 represent the money working in the business, thus show money flow in the business. Both are similar for they are the working capital of a business. They indicate the amount of money invested in the business as well as the profit gained. They both indicate the amount of borrowed capital flowing in the business.Further, they indicate any other form of capital that are used to run a personal business, such as, a dealer servicing ones business with goods then settling the dues later. Debt and equity in personal financial life parallels the basic capital structure de cisions made by a firm since the amount of money invested at the launch of the business, together with the sum total of goods provided by a dealer to be paid later in form of equity, is indicated.The amount of money borrowed by an individual to help fix their capital is indicated as equity for it represents the total amount borrowed to run the business. Modigliani and miller MM employed the concept of arbitrage to develop their theory. Explain the concept of arbitrage and the role of arbitrage in the MM model. Discuss the assumptions and the issues underlying the MM model. http//www. rdboehme. com/MBA_CF/Chap_15. pdf The concept of arbitrage can be explained using the analogy deuce different markets with one selling at a lower price.Sellers will buy from the low-price market and sell in the market with high prices. The prices thus tend to rise in the low-priced market until the difference is bridged. The role of the MM model is to indicate the safety of investments, that is, if a firm runs cardinal companies, then one might have high market value per share but be very risky regarding market price per share. Conversely, the other may be low market price. Investors will then sell the shares of the risky firms and purchase the others, thus standardizing the average cost of capital of the group.The assumptions of the MM model are that the capital market is perfect if only the investors know the market forces. Further, the model classifies firms in groups according to business risks. Investors are assumed to use the operating income to determine the market price. It is also assumed that there are no corporate income taxes. The issues underlying the MM model are that it is very hard to run a business without paying of taxes. Further, the market prices fluctuate, thus the knowledge about market prices is not conclusive. It is thus hard to gauge the market price.