Financial Decisions
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- Category: Politics: Economics
- Date Submitted: 10/02/2010 01:05 PM
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FIRMS FINANCIAL DECISIONS
As an individual or group of individuals are looking at either establishing a business or expanding on an existing business, several factors and processes in the decision making need to be considered and addressed. This is most important when starting or expanding a business funds may need to be acquired to meet expected growth.
There are various ways that a firm can raise revenue. The most common way for a public firm is through stocks or bonds. Bonds allow a company to borrow money from investors and pay back the Principal by a specific future date or paid periodically through the period of the loan. The price of the bond varies inversely to the interest rate that is calculated by open market operations and the discount rate set by the Feds. The payments paid on a bond is a fixed amount. The price in which a bond is purchased determines its yield or interest rate. The lower the bond the higher the yield and visa versa when the higher the price of the bond the percentage of return is lower. An organization is given a bond rating by Moody’s and Standard & Poor’s. The quality of a bond is based on the rating that the firm is given based on their ability in paying back the loan. The value of the bond can be calculated by Bond value = Bond value (assuming no chance of default) - value of put . Another way to look at bond value is to base it on a companies asset and is calculated as Bond value = asset value - value of call on assets. The put value isn’t the easiest to calculate, therefore the best approach in finding a value for the company’s bond is by using the asset value approach. Bond valuation is the ability to calculate the present value of the interest to be paid on the loan and the value of the bond upon maturity. The value uses several factors which include the bond rating based on the firm’s ability to pay back the loan, the potential of the bond’s price appreciation, the company’s growth...
As an individual or group of individuals are looking at either establishing a business or expanding on an existing business, several factors and processes in the decision making need to be considered and addressed. This is most important when starting or expanding a business funds may need to be acquired to meet expected growth.
There are various ways that a firm can raise revenue. The most common way for a public firm is through stocks or bonds. Bonds allow a company to borrow money from investors and pay back the Principal by a specific future date or paid periodically through the period of the loan. The price of the bond varies inversely to the interest rate that is calculated by open market operations and the discount rate set by the Feds. The payments paid on a bond is a fixed amount. The price in which a bond is purchased determines its yield or interest rate. The lower the bond the higher the yield and visa versa when the higher the price of the bond the percentage of return is lower. An organization is given a bond rating by Moody’s and Standard & Poor’s. The quality of a bond is based on the rating that the firm is given based on their ability in paying back the loan. The value of the bond can be calculated by Bond value = Bond value (assuming no chance of default) - value of put . Another way to look at bond value is to base it on a companies asset and is calculated as Bond value = asset value - value of call on assets. The put value isn’t the easiest to calculate, therefore the best approach in finding a value for the company’s bond is by using the asset value approach. Bond valuation is the ability to calculate the present value of the interest to be paid on the loan and the value of the bond upon maturity. The value uses several factors which include the bond rating based on the firm’s ability to pay back the loan, the potential of the bond’s price appreciation, the company’s growth...