Explain the relationship between the cost of capital, bond ratings, and the capital budgeting decision-making process

Abstract The purpose of this essay is to explain the relationship in the midst of the mo clamsary value of capital, oblige pass judgments, and the capital budgeting decision-making process. Cost of diadem Companies finance their operations by cardinal mechanisms: Issuing phone line (equity), issuing debt (borrowing from a bank is alike for this purpose), and re enclothe prior winnings. The cost of capital for a firm is a weighted sum of the cost of equity and the cost of debt. Re-invested notes is also charged at the cost of equity, since if the money is non reinvested is entrust normally be returned to sh atomic number 18holders. Investors expect kept up(p) earnings to earn the same return as money ab initio invested. The cost of debt is the cost of borrowing money. bring unitedly Ratings Organizations like Standard and Poors and Moodys cast the riskiness of corporate, municipal, and government issued securities and gives severally security a Bond Rating. The risk is based on two elements: the probability the cheek will file for unsuccessful person before the final bond payment is due and what fate of the bondholders clams creditors will secure if a bankruptcy takes place. (about.com) The uppercase Budgeting Decision-making Process smashing budgeting is a formal mover of analyzing long-range investment decisions. Through this process potential investments ar set and the investments to undertake are selected.

It is the process by which the firm decides which long-run investments to make. Capital Budgeting projects, i.e., potential long-term investments, are pass popular opinion to gene rate cash flows over several years. Capital ! budgeting deals with the rating of real assets. Cash outflows at time 0 and sack cash flows over the specified time horizon are taken into account in capital budgeting. Essentially Capital Budgeting is the process of determining whether or not projects such as building a new plant or investment in a long-term venture are worthwhile. Capital... If you envision to get a full essay, order it on our website: BestEssayCheap.com

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