Equity capital

Capital Investment. Erom the viewpoint of a project, all of the capital that must be raised is external capital. Equity capital is the ownership capital, eg, common and preferred stocks or retained cash, whereas debt capital consists of bonds, mortgages, debentures, and loans. Nearly all investment involves a mixture of both types so as to maximize the return on investment (21). The debt ratio (debt/total capital) for the chemical industry is typically over 30%. Because financial details are not well known during the preliminary phases of project analysis, the investment is viewed simply as the total capital that must be expended to design and build the project. 

Distributed Darnings. The dividends distributed to stockholders provide the earning on equity capital ia the same way that iaterest is the earning on the debt capital. However, the dividends are an after-tax expense and represent an arbitrary management decision. 

Equity capital cost, 9 542 Equivalent box model (EBM) for polymer blends, 20 344 volume fraction calculation in, 20 345-346... 

The discount rate is a weighted average cost of capital (WACC) and takes into account the capital structure of firms, cost of equity and debt, and income taxes. The capital structure of firms is assumed to be 30% equity and 70% debt. The cost of equity capital is 10%, the cost of debt is 7%, and the effective income tax rate is 39%. The debt instrument is assumed to be a 20 year, 7% coupon bond. The calculation of the discount rate is... 

Many of the PV electrolytic H2 production and distribution system components have an operating life that will exceed the assigned thirty-year capital recovery period. With the amortization of debt capital and the depreciation of equity capital assets, post-year-thirty H2 production and distribution costs will decline. With the capital amortization of system components, H2 production cost is reduced to O M expenses for those system components. Therefore, it makes sense to evaluate both first and second generation H2 production costs. First generation H2 production is defined as the initial thirty-year capital recovery period, and second generation H2 production is defined as the post-amortization, Year 31-Year 60 H2 production period. 

There are several differences in the financial assumptions. The H2A real after-tax discount rate is 10%, whereas in this study the real after tax discount rate is 6%. The variation is attributable to differences in the capital structure for investments. The H2A uses a 100%-equity capital structure, whereas this study uses a capital structure of 30% equity capital and 70%-debt capital. The cost of debt is 10% for the H2A default value for 7% (30-year coupon bond) for this study. The tax rate is the same in both studies. The H2A assumptions include an inflation factor of 1.29%, while this study does not include an inflation factor, which is explained in Appendix 2. The net effect of these differences in financial assumptions is a lower levelized H2 pump price estimate for this study compared to the levelized H2 pump price under the H2A financial assumptions. 

The assumptions of this study are premised on the commitment to a multi trillion dollar, centralized H2 production and delivery system in the U.S. over a thirty-year time period. Therefore, it is believed that the capital structure assumptions of 30% equity capital and 70% debt are more realistic for the assumed scale of capital investments. In addition, there are cash flow benefits to financing capital budgeting projects with debt capital rather than equity capital because interest on debt is tax deductible whereas dividends payments are not. The 7% interest rate for 30-year coupon bonds is a reasonable assumption for the assumed scale of investments, particularly so if a national H2 plan is adopted with government regulation and guaranteed bond issues. 

Care should be taken in deciding how much of the investment costs should be financed with equity capital and how much with outside capital. 

Capital charges—these include interest payments due on any debt or loans used to finance the project, but do not include expected returns on invested equity capital—see Section 6.6. 

The cash cost of production is the cost of making products, not including any return on the equity capital invested. By convention, byproduct revenues are usually taken as a credit and included in the VCOP. This makes it easier to determine the /lb cost of producing the main product. 

Equity capital consists of the capital contributed by stockholders, together with earnings retained for reinvestment in the business. Stockholders purchase stocks in the expectation of getting a return on their investment. This return can come from the dividends paid annually to stockholders (the part of earnings returned to the owners) or from growth of the company that is recognized by the stock market and leads to an increase in the price of the stock. Most stock is usually held by sophisticated institutional investors such as banks, mutual funds, insurance companies, and pension funds. These investors employ expert analysts to assess the performance of companies... 

The stockholders expectation of return on their equity can be expressed as an interest rate and is known as the cost of equity capital. The cost of equity required to meet the expectations of the market is usually substantially higher than the interest rate owed on debt because of the riskier nature of equity finance (since debt holders are paid first and hence have the primary right to any profit made by the business). For most corporations in the United States at the time of writing, the cost of equity is in the range 25 to 30%. 

If, however, die securitization transaction is oH balance dieel a strict ddbt-to-debt comparison may understate securitization s benefits. Off balance riieet securitization has its own inherent advanti es because it does not put pressure on the originator to raise additional equity capital. See Rosenthal Ocampo, supra note 5, at 33. 

The return-on-equity ratio is the net income after taxes and interest divided by stockholders equity. It measures the return on the equity capital invested in the firm. Since one of management s objectives is to earn the highest return for the stockholders, this ratio is probably the best measure of management s performance. 

The cost of capital is the rate of return investors require to induce them to invest in a company with a given level of risk. The weighted average cost of capital is the blended cost of the fro s debt and equity capital (285,409). 

The cost of equity capital for a company as a whole is given by the following formula ... 

The cost of equity capital increases as the firm takes on more debt (%). Empirical estimates of the cost of equity capital for an industry are therefore based on the observed capital structure (i.e., the ratio of debt to equity) in the industry. This approach assumes that the capital structure of firms in an industry is optimal. 

Pharmaceutical firms have little debt, so the total cost of capital is close to the cost of equity capital. Based on all of the information given above, Myers and Shyam-Sunder estimated the real cost of capital for 17 pharmaceutical firms at the start of the year in 1980, 1985, and 1990 at 9.9, 10.7, and 10.2 percent respectively. 

The cost of capital is what it costs a company to borrow money from aU sources. Three general sources of capital available are borrowed money, equity capital, and retained earnings. For borrowed capital (from investment houses, banks, insurance companies, and venture capitalists), the interest rate on loans is a few percentage points above the prevailing prime interest rate. The interest rate charged also depends on the length of the loan, size of the loan, and potential risk perceived by the lender. For equity capital, obtained from the sale of preferred and/or common stock, companies may float new stock issues or have shares of stock that may be released to secure capital funds. Retained earnings or reserves may be used to the extent of their availability. 

The two curves for cellulose alcohol represent the economics for 100% investor equity capital and for municipal bond financing. Also shown on the figure is the projected selling price for ethanol at 7% and 5% inflation rates. The cellulose alcohol curve with municipal bond financing shows the effect of interest losses prior to the first operating year. The third-year selling price is more representative of actual economics. 

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