ch 5 - 1 McGill Faculty of Engineering MIME 310 Engineering...

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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 are 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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ch 5 - 1 McGill Faculty of Engineering MIME 310 Engineering...

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