ACCOUNTING

Accounting

Accounting

PART A: Planning and control of capital expenditure

Introduction

Value Investing is simply to invest in assets whose intrinsic value is well below its market price. Therefore, the only thing that should be taken into account when investing is the current price and intrinsic value of the assets.

Discussion

There are several methods to calculate the capital investment. In this part we will use three methods: The basic methods that companies use to evaluate the projects and decide whether to accept them or not:

Payback period (PB): e s the reason for the fixed initial investment divided by annual cash income during the recovery period.

Net Present Value (NPV): e s approach to discounted cash flow capital budgeting. With this method, all discounted cash flows to present value using the required rate of return.

Average Rate of Return (ARR): e s the discount rate that equates the present value of expected cash outflows with the present value of the expected income.

To determine the acceptability of a project using any of these techniques, it is necessary to determine their expected cash flows. But unlike the IRR and NPV, the recovery period model does not consider the value of money over time.

The cost of capital is the minimum rate of return which I will remunerate various financial sources to make its liabilities, in order to keep their investors happy avoiding at the same time, to lower the market value of their shares. This cost is also the discount rate of future corporate profits or the minimum limit of profitability that the company will require investments.

The cost of capital is one of the main factors determining the value of the company to be used as the discount rate that updates the current cash flows that the company promises to generate. A high risk implies a higher capital cost and therefore low value of the securities of the company. And since the issuance of these securities is responsible for providing the necessary funding to make the investment, the cost of such funding will increase when the value of such securities is low, and fall when their value increases.

If the company gets a return on its investment sufficient to pay its financial sources is expected that the market price of its shares will remain unchanged. If the return on investment exceeds the cost of the financial resources used in them, the stock price would rise in the market, on the contrary, if the cost is greater than the expected return of the project and, even so, this is acometiese the market value of the shares would fall reflecting the loss associated with the bad investment decision.

In the study of the cost of capital is based on the specific sources of capital to seek fundamental inputs to determine the cost of capital of the company, these sources should be long term as these are those that provide permanent financing.

The main sources of long-term funds are long-term debt, preferred stock, common stock and retained earnings, each associated with a specific cost and ...