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Essay / Research Paper Abstract
10 pages. This paper shows the importance of capital budgeting to the overall financial management plan of a company. Included is a look at the four-way model of capital budgeting as well as other applications.
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Page Count:
10 pages (~225 words per page)
File: D0_JAcapbud.rtf
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the four-way model of capital budgeting as well as other applications. EQUIVALENCE MODELS AND MARKET DETERMINATION One of the many theories explored
in Management Accounting and Corporate Finance is that of the four-way equivalence model. The determination used in this model is useful for many applications and can be applied to
the domestic as well as international firms. The financial manager is interested in such things as the weighted average cost of capital, the capital asset pricing model, and by
using all this information can make intelligent decisions based on these. In the weighted average cost of capital the cost of each kind of capital is weighted according to its
percentage share in the firms capital structure. Weights can be based on either the book values or the market values of the different classes of securities, but should be
market values whenever they are available. The investor should realize that the usual method is to see what past growth rates have been and put those into the equation
as a factor; however, this assumes that the future will be like the past which is a specially hazardous assumption when interest rates and especially inflation rates, accounting methods and
stock prices have been changing widely. DETERMINING THE COST OF CAPITAL In determining the cost of capital, it would be important to
base the cost of equity on conditions in present markets. This is because present markets and currently required returns are what the present shareholders and investors will be looking
for. Stock ownership by institutions does not change the way we calculate the cost of equity; however, it may change the resulting cost because institutions may require a rate
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