MIME 310 - Chapter 5

MIME 310 - Chapter 5 - McGill Faculty of Engineering MIME...

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McGill Faculty of Engineering MIME 310 Engineering Economy Chapter 5 – Sources of Funds and Cost of Capital “Nervus belli, pecuniam infinitum” , Cicero (106-43 B.C.) “The sinews of war: money in abundance” Where does a business obtain funds to finance its projects and what are the cost of these funds? ection 1: Sources of Funds Outline Section 1: Sources of Funds • Debt and Equity – Long-term sources • Medium and short-term sources Section 2: Cost of Capital • Cost of individual sources • Capital structure • Weighted cost of all sources • Examples 1
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McGill Faculty of Engineering MIME 310 Engineering Economy Section 1: Sources of Funds L 1. Long-term Sources (permanent) DEBT • Bonds EQUITY • Common Shares • Debentures • Bank Loans • Preferred Shares • Retained Earnings 2. Medium-term Sources (temporary) • Leasing 3. Short-term Sources (temporary) • Term Debt (e.g. notes payable) • Accounts Payable • Bank Margin Account 2
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McGill Faculty of Engineering MIME 310 Engineering Economy ast coupon BOND Last coupon 5 February, 1998 Face Value Coupon Semi-annual ayment Maturity ate payment $968.75 Date Coupon Rate 7.75 % 3 First coupon 5 August, 1993
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McGill Faculty of Engineering MIME 310 Engineering Economy COMMON SHARE CERTIFICATE rofessor Bilodeau Professor Bilodeau Mining Engineering McGill University Number of shares No Par Value indicated 4
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McGill Faculty of Engineering MIME 310 Engineering Economy 5
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McGill Faculty of Engineering MIME 310 Engineering Economy Chapter 5 – Sources of Funds and Cost of Capital tline Section 1: Sources of Funds Outline ection 2: Cost of Capital • Debt and Equity – Long-term sources • Medium and short-term sources Section 2: Cost of Capital • Cost of individual sources • Capital structure •W e ighted cost of all sources • Examples 6
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McGill Faculty of Engineering MIME 310 Engineering Economy Section 1: Debt and Equity Long-term Sources Consists of borrowing funds by: Debt Issuing Bonds , using specific assets as collateral Debentures , secured by good credit rating of company Obtaining ank loan or mortgage using specific assets as Bank loan or mortgage , using specific assets as collateral 7
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McGill Faculty of Engineering MIME 310 Engineering Economy Section 1: Debt and Equity Bonds and Debentures • Issued privately or publicly (by investment brokers) • Issuing expenses haracteristics • Characteristics Face Value – Nominal amount written on bond or debenture; presents principal i e investment by purchaser unless a represents principal, i.e. investment by purchaser, unless a discount was given aturity Date – nd of bond life i e d e at which Face Value Maturity Date End of bond life, i.e. date at which Face Value becomes due to owner Coupon Rate – Pre-established interest rate (nominal) paid on Face Value 8
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McGill Faculty of Engineering MIME 310 Engineering Economy Section 1: Debt and Equity Bonds and Debentures • Interest payments made by company are tax deductible, i.e.
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MIME 310 - Chapter 5 - McGill Faculty of Engineering MIME...

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