Chapter5 - 1 McGill Faculty of Engineering MIME 310...

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Unformatted text preview: 1 McGill Faculty of Engineering MIME 310 Engineering Economy Section 2: Cost of Capital Cost of individual sources Capital structure Weighted cost of all sources Examples Chapter 5 Sources of Funds and Cost of Capital Section 1: Sources of Funds Debt and Equity Long-term sources Medium and short-term sources Where does a business obtain funds to finance its projects and what is the cost of these funds? Nervus belli, pecuniam infinitum , Cicero (106-43 B.C.) Outline The sinews of war: money in abundance 2 McGill Faculty of Engineering MIME 310 Engineering Economy 3. Short-term Sources (temporary) Accounts Payable Bank Margin Account 2. Medium-term Sources (temporary) Leasing Term Debt (e.g. notes payable) Section 1: Sources of Funds 1. Long-term Sources (permanent) DEBT Bonds Debentures Bank Loans EQUITY Common Shares Preferred Shares Retained Earnings 3 McGill Faculty of Engineering MIME 310 Engineering Economy BOND Face Value Coupon Coupon Rate 7.75 % Semi-annual payment $968.75 Maturity Date First coupon 5 August, 1993 Last coupon 5 February, 1998 4 McGill Faculty of Engineering MIME 310 Engineering Economy Professor Bilodeau Mining Engineering McGill University COMMON SHARE CERTIFICATE Number of shares No Par Value indicated 5 McGill Faculty of Engineering MIME 310 Engineering Economy 6 McGill Faculty of Engineering MIME 310 Engineering Economy Section 2: Cost of Capital Cost of individual sources Capital structure Weighted cost of all sources Examples Section 1: Sources of Funds Debt and Equity Long-term sources Medium and short-term sources Outline Chapter 5 Sources of Funds and Cost of Capital 7 McGill Faculty of Engineering MIME 310 Engineering Economy Consists of borrowing funds by: Issuing Bonds , using specific assets as collateral Debentures , secured by good credit rating of company Obtaining Bank loan or mortgage , using specific assets as collateral Section 1: Debt and Equity Long-term Sources Debt 8 McGill Faculty of Engineering MIME 310 Engineering Economy Bonds and Debentures Issued privately or publicly (by investment brokers) Issuing expenses Characteristics Face Value Nominal amount written on bond or debenture; represents principal, i.e. investment by purchaser, unless a discount was given 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 Section 1: Debt and Equity 9 McGill Faculty of Engineering MIME 310 Engineering Economy Interest payments made by company are tax deductible, i.e....
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Chapter5 - 1 McGill Faculty of Engineering MIME 310...

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