contributed capital

Examples of contributed capital in the following topics:

• Impact of the SML on the Cost of Capital

  • The plotted location of an instrument on the SML has consequences on its price, return, and cost of capital it contributes to a firm.
  • Companies often turn to capital markets in order to generate funds -- using the issuance of either debt or equity.
  • The cost of obtaining funds in such a manner is known as a company's cost of capital.
  • This would not be an attractive market situation for a company looking to raise capital.
  • Describe the impact of the SML on determining the cost of capital

• MVA and EVA

  • Market Value Added (MVA) is the difference between the current market value of a firm and the capital contributed by investors.
  • Quite simply, EVA is the profit earned by the firm, less the cost of financing the firm's capital.
  • The idea is that value is created when the return on the firm's economic capital employed is greater than the cost of that capital.
  • EVA is net operating profit after taxes (or NOPAT) less a capital charge, the latter being the product of the cost of capital and the economic capital.
  • where r is the return on investment capital (ROIC); c is the weighted average of cost of capital (WACC); K is the economic capital employed; NOPAT is the net operating profit after tax.

• The Cost of Preferred Stock

  • Because preferred stock carries a differing amount of risk than other types of securities, we must calculate its asset specific cost of capital to work into our overall weighted average cost of capital.
  • If preferred dividend is known and fixed, we can use the following equation to calculate the cost of capital for preferred stock .

• Disadvantages of the IRR Method

  • In cases where one project has a higher initial investment than a second mutually exclusive project, the first project may have a lower IRR (expected return), but a higher NPV (increase in shareholders' wealth) and should thus be accepted over the second project (assuming no capital constraints).
  • Moreover, since IRR does not consider cost of capital, it should not be used to compare projects of different duration.
  • Modified Internal Rate of Return (MIRR) does consider cost of capital and provides a better indication of a project's efficiency in contributing to the firm's discounted cash flow.

• Defining Venture Capital

  • Venture capital is a method of financing a business start-up in exchange for an equity stake in the firm.
  • Investors combine their financial contributions into one fund, which is then used to invest in a number of companies.
  • The technology firms of Silicon Valley and Menlo Park were primarily funded by venture capital.
  • A VC firm's contributions often extend beyond financial funding.
  • Facebook is one example of a entrepreneurial idea that benefited from venture capital financing.

• Role of Financial Markets in Capital Allocation

  • One of the main functions of financial markets is to allocate capital, matching those who have capital to those who need it.
  • One of the main functions of financial markets is to allocate capital.
  • Capital markets especially facilitate the raising of capital while money markets facilitate the transfer of liquidity, matching those who have capital to those who need it.
  • Long-term capital can come in the form of shared capital, mortgage loans, and venture capital, among other types.
  • Many individuals are not aware that they are lenders providing capital, but many do lend money at least indirectly, for example when they put money in a savings account or contribute to a pension.

• Ownership Nature of Stock

  • The stock of a company represents the original capital paid into the business by its founders and can be purchased in the form of shares.
  • The capital stock (or stock) of a business entity represents the original capital paid into or invested in the business by its founders.
  • For example, labor, suppliers, customers and the community are typically considered stakeholders because they contribute value and/or are impacted by the corporation.

• The Marginal Cost of Capital

  • The marginal cost of capital is the cost needed to raise the last dollar of capital, and usually this amount increases with total capital.
  • The marginal cost of capital is calculated as being the cost of the last dollar of capital raised.
  • Generally we see that as more capital is raised, the marginal cost of capital rises .
  • The Marginal Cost of Capital is the cost of the last dollar of capital raised.
  • Describe how the cost of capital influences a company's capital budget

• Sales Forecast Input

  • Target volume, price, and contribution margin per unit are the key inputs to a sales forecast.
  • includes/excludes amounts capital goods & services, non-capital goods & services, input valued-added tax, with cost of non-capital goods sold
  • Target Volume = [Fixed costs + Target Profits] / Contribution per Unit
  • Target Revenue = 100 * [ { Fixed Costs + Target Profits } / Contribution Margin ]

• Interpreting Overall Cash Flow

  • Thus, these cash flows are essential to helping analysts assess the company's ability to meet ongoing funding requirements, contribute to long-term projects and pay a dividend.
  • One such ratio is that for capital acquisitions:
  • Capital Acquisitions Ratio = cash flow from operating activities / cash paid for property, plant and equipment
  • A common definition is to take the earnings before interest and taxes, add any depreciation and amortization, then subtract any changes in working capital and capital expenditure.
  • The free cash flow takes into account the consumption of capital goods and the increases required in working capital.