Chap014 - 14- 1Ch 14: Financing decisions and market...

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Unformatted text preview: 14- 1Ch 14: Financing decisions and market efficiencySo far our focus has been on the investment decision. Now we turn to the problem of paying for these investments. –Should it issue more stock or should it borrow?–Should it borrow short term or long term–Should it reinvest most of its earning or pay dividends. 14- 2Financing decisions and market efficiencyAlthough it’s helpful to separate investment and financing decisions, there are basic similarities in the criteria for making them. The decision to purchase a machine tool and to sell a bond each involve valuation of a risky asset. The face that one asset is real and the other is financial doesn’t matter. In both case, we end up with calculating NPV. 14- 3Financing decisions and market efficiencyHowever, it may be harder to find positive NPV financing opportunities. Investors who supply financing are numerous and they are smart. They (somehow) know your business’s risk and assign a fair discount rate to your cash flow. That is, your securities are fairly priced and the capital markets are efficient.14- 4Difference between investment and financing decisionsThe number of different securities and financing strategies is well into the hundreds. In some ways, financing decisions are more complicate than investment decisions. When firms look at capital investment decisions, it does not assume that it is facing perfect, competitive markets. The firm own a unique asset that give it an edge over its competitors. 14- 5Difference between investment and financing decisionsIn financing markets your competition is all other corporations seeking funds. 14- 6Efficient MarketThe movement of stock prices from day to...
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This note was uploaded on 01/29/2011 for the course ACCT 2555 taught by Professor Ren during the Winter '10 term at UWO.

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Chap014 - 14- 1Ch 14: Financing decisions and market...

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