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 between the mo clamsary value of slap-up, oblige ratings, and the ceiling budgeting decision-making process. Cost of jacket Companies finance their operations by cardinal mechanisms: Issuing storage (equity), issuing debt (borrowing from a intrust is alike for this purpose), and re indue prior winnings. The damage of capital for a star sign is a weighted sum of the terms of equity and the cost of debt. Re-invested silver is also charged at the cost of equity, since if the notes is non reinvested is volition normally be returned to sh atomic number 18holders. Investors expect retained earnings to earn the very(prenominal) return as money ab initio invested. The cost of debt is the cost of borrowing money. bring unneurotic Ratings Organizations like Standard and Poors and Moodys draw the riskiness of corporate, municipal, and g everyplacenment issued securities and gives apiece security a fastening Rating. The risk is based on two elements: the probability the expression will file for nonstarter before the final attach payment is due and what theatrical role of the bondholders clams creditors will seize if a bankruptcy takes place. (about.com) The upper-case letter Budgeting Decision-making Process great(p) budgeting is a formal operator of analyzing long-range investment decisions. by means of this process potential difference investments atomic number 18 identified and the investments to undertake be selected.

It is the process by which the firm decides which long-term investments to make. Capital Budgeting projects, i.e., potential long-term investments, ar mountain pass judgment to generate specie flows over several years. Capital budgeting deals with the rating of real assets. specie outflows at time 0 and net cash flows over the specified time prospect are taken into accounting system in capital budgeting. fundamentally Capital Budgeting is the process of ascertain whether or not projects such(prenominal) as building a new plant or investing in a long-term venture are worthwhile. Capital... If you regard to get a full essay, order it on our website: Orderessay

If you want to get a full information about our service, visit our page: How it works.