Mod 8.1 Financing Options

Mod 8.1 Financing Options - MBA 502 Diane E. Malone Module...

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MBA 502 Diane E. Malone Module 8.1 Financing Options August 24, 2010 It Takes Money to Make Money It takes money to make money. It might be a trite phrase, but it is true. The various ways of raising or growing capital are borrowing from a bank, using the company’s money, issuing bonds, and going public and offer portions of the company to investors. A company first needs to assess their situation and ‘compare the cost of the new capital to the benefits it will obtain in the future’ through the utilization of the capital (Pindyck & Rubinfield, 2009). The problem the company will face is the value of today’s dollar and that of the future dollar. This is because we do not know and cannot know the true value of the dollar in the future. One may utilize the ‘discounted present value, which implies that a dollar spent today is worth more than a dollar in the future’ (Pindyck & Rubinfield, 2009). We infer that a dollar today could be invested and therefore ideally worth more in the future by earning interest through either being saved or invested. In other words, today’s dollar is worth the dollar plus interest earned (Pindyck & Rubinfield, 2009). One way in which a dollar may be worth more in the future is by utilizing it to build capital but this should only be done if the discounted present value of the capital to be made from the investment is higher than what it costs to obtain the additional capital now (Pindyck & Rubinfield, 2009). If you can pay over a period of years, one must consider the discounted present value of the revenue to be made in the future in respect to the discounted present value of the costs interred (Pindyck & Rubinfield, 2009). When discounting, the interest rate utilized is commonly paid for by a risk-free asset, for example the 30- year United States Treasury bond. U.S. bonds are generally more consistent and ‘solid’ than other more Borrowing from a bank, or taking out a loan, is not wise because it is ‘cost-high’. This is true because the
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Mod 8.1 Financing Options - MBA 502 Diane E. Malone Module...

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