Paper Example on Investments

4 pages
1035 words
University of Richmond
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1. The connection between the value of shares and dividends.

Dividends have an impact on the prices of shares being that they exist as an outcome of buying the share. When it comes to the performance of the stock market, shares bought bring out huge dividends than most investors will purchase and maintain shares of stock. Fluctuations in prices of shares of the stock market are large as a result of investors. When shares increase, investors increase in a dream of ripping maximum profits which in turn increases the price of shares at the stock exchange. On the other hand, dividends can be issued regarding shares of stock or cash with the connection between dividends and shares is that dividends are incomes earned from shares in a profitable company.

2. How the value of shares is related to the cost of capital.

Comparing the value of shares about the cost of capital is that the value of a share is dependent on its market price. Companies raise equity capital by selling stock. Most organizations are required to have a specific amount of capital they want to raise and the value of each of their shares, with the share capital being the total value of shares a company intends to sell. When a company sells shares of stock, they raise share capital. The relation between the value of a share and the cost of capital is that the cost of capital needed is what will determine the value of a share. Shares are what add up to make or meet the cost of capital.

3. How to make a successful long-term investment decision.

Selection of a new or existing asset that is likely to bring profit in future is important since it is likely to impact profitability and the nature of the risk involved. Analysis of all possible faults and risks involved in a proposal is significant; this involves consideration of uncertainties and all possible outcomes of the project. The long term investment decision is the most difficult growth decision to make. Evaluation of performance of the project into the future and relating the predicted performance to the possible profit, because the substantial loss cannot be reversed commitment is required. Rising of capital to fund the long term investment is significant since it helps in sustaining the business in future.

4. The criteria and techniques used to evaluate a capital project.

One significant criterion is the net present value, in this technique; it involves a rate of discount that it used on profit estimate of the future. If the discounted target profit is more than the money used to start the investment, then the project is given a go ahead. In that case, the project will meet or surplus the expected. Focusing on the internal return rate, this technique does not focus on the value of time and money but rather the profits on the entire projects life. Investment return in this criterion puts the focus on increased profit rather than expanding investments. Payback emphasizes on the period it will take for the project to recover money on the investment.

5. How to calculate risk and cost in capital projects. Assessing the degree in which the current performance is risky in that the current causes of a risk and degree of risks being faced should be assessed before the evaluation of new products. Evaluation of individual projects consistently so that all projects that are potential are evaluated. Capital projects with high-risk returns should be given priority. Calculation of cost involves making a record of all steps involved in bringing a project to success. Estimating the time frame each step will take to record internal and external labor costs, researching on materials and an estimate of their costs, adding the cost overruns and coming up with a procedure to calculate the total estimate of the project.

6. The process and sources used to raise capital.

One major source and process is increasing margins of profit. This can be done by selling more products or increasing individual prices of each product sold. Additionally, improving the turnover of assets is important as a company can raise capital by making more sales that are relative to its assets, this can be done since the company is required to be more efficient. On the other hand, it is important to ensure distribution of cash that is idle to prevent wastage. This can be done through different firms taking care of their capital when it boosts its return on equity by distributing idle cash to its share holders. Coming up with strategies that help the firm reduce tax rates, increasing levels of debt can increase levels of returns in a company if there is a balance with capital equity.

7. How raising debt levels increases the value of the firm.

Ideally, the value of a firm can be increased with an increase in debt level about the firms equity capital. Companies can increase their value with debt and capital equity. Companies with higher debts have higher returns on equity when compared to those that dont. Comparatively, a company with higher debt level is likely to have fewer shareholders that that without debt. On the other hand, firms with increased debt levels have higher returns on equity because it is calculated by dividing the net income by equity of shareholders. Lastly, the increased debt is a leverage of finance, and if the return on equity is higher than the after-tax cost of debt, then the debt will increase the firms value.

8. Why companies should avoid reaching the highest level of debt.

There is a risk of bankruptcy if a financial debt that has primacy over equity is over utilized. If a firm raises a debt and does not make use of it by storing it in the bank, they will have a high balance of cash and increased liability for the debt. Raising levels of debt decreases the Weighted Average Cost of Capital because equity is considered to be more expensive than debt and the proportions of equity to debt are decreasing. Increasing debt puts a company at a risk of failing to pay the debt making it a risky investment and the expectations of stockholders will be low.


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