Loans stock

Figure 6-1 shows the concept of cash flow for an overall industrial operation based on a support system serving as the source of capital or the sink for capital receipts. Input to the capital sink can be in the form of loans, stock issues, bond releases, and other funding sources including the net cash flow returned to the... 

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. 

The advantage of using common stock to finance assets is that it does not incur nxed interest charges. Furthermore, there is no maturity date, as there is with all loans and most preference issues. Common stock can often be issued more easily than debt can be financed. However, the flotation costs of common stock can be quite high, especially when stock values are depressed, so that large discounts for the stock are needed to induce purchase. 

A positive value of any term in Eq. (9-177) implies an increase in working capital, and a negative value a decrease. For example, the sale of fixed assets such as plant, buildings, land, etc., is a source of cash, and the purchase of fixed assets uses up cash. Similarly, an increase in financial resources in the form of loans and stock and bond issues is a source of cash, and a decrease in financial resources in the form of repayment of loans, retirement of stocks and bonds, and the payment of cash dividends uses up cash. (Note that a stock dividend as opposed to a cash dividend does not use up cash.)... 

Sometimes, fixed assets are purchased via short-term loans, which can lead to hquidity problems. For the most part, fixed assets should be financed from long-term or permanent capital such as stocks or bonds. The proven abihty of management to handle working capital efficiently will put a company in a better position to obtain such longterm capital when required, because the confidence of bankers and stockholders will have been obtained. 

We prepared our science advisors with training on how to interact effectively with teachers and students, and we developed an Education Resource Center where they could borrow both activity plans and equipment to help their teachers do interesting hands-on science activities in their classes. This resource center was stocked both with commercial educational materials, as well as selected surplus equipment. Computers turned out to be particularly popular items—we now loan out on an annual basis about 200 computers that are outmoded for our technical purposes, but that the schools are delighted to have. At the request of teachers, our science advisors have ended up doing many of the same things as the School Partnership participants. About 50% of them do at least some activities directly with students. Others provide help in understanding science content, coordinate access to the resource center, assist with science fairs, and provide support for teachers in a variety of other ways. 

Interest on loans from banks, preferred stock and bonds is paid at a fixed rate of interest. A share of the profit of the company is paid as a dividend on common stock and preferred stock (in addition to the interest paid on preferred stock). 

Since common stock (or equity) costs more than bonds, why do companies issue stock This is because a company is only able to borrow money at a good rate if the lender is 100% sure he can get his money back plus interest. The less sure he is that he can get his investment back, the higher the interest rate. When a bank is asked to finance the building of a private home it will rarely lend more than 85% of the cost of construction. It also insists that the house be insured, with the bank having the first lien. This means that in case of a catastrophe the bank loan is repaid first. Then the other creditors and the owners receive what is left. A lien s significance is that it takes precedence over all other debts. Even under this arrangement an individual is... 

This would also look better to stockholders. They hold a larger share in the company and would at least get something back in case of a disaster. Therefore the stock would sell for more (and have a higher present value to the company) than the stock of the company whose balance sheet was given in Table 10-13 (assuming each had the same number of shares outstanding). This indicates that there is a balance that must be maintained between the total value of the loans, bonds, and stocks outstanding. 

For example, a library management system deals with loans, reservations, and stock control. A third-party component is bought to deal with membership. This is a conventionally written component (probably built atop a standard database) with an API that allows members to be added, looked up, updated, and deleted. 

Reify the major continuous use cases (see Section 6.5.7.1, Reifying Actions, and Pattern 16.3, Reifying Major Concurrent Use Cases) that the system supports—often corresponding to business departments—such as loan books and manage stock. Each of these use cases can become a component that itself can be further reified. This approach provides a vertical partitioning of the component. 

Cost of capital The cost of borrowing money from all sources, namely, loans, bonds, and preferred and common stock. It is expressed as an interest rate. 

The cost of capital is what it costs a company to borrow money from all sources, such as loans, bonds, and preferred and common stock. It is an important consideration in determining a company s minimum acceptable rate of return on an investment. A company must make more than the cost of capital to pay its debts and make a profit. From profits, a company pays dividends to the stockholders. If a company ignores the cost of capital to increase dividends to the stockholders, then management is not meeting its obligations to pay off outstanding debts. 

ESOP Stock Plan (Employees Stock Ownership Plank This type of plan is in wide use. Typically, the plan borrows money from a bank and uses those funds to purchase a large block of the corporation s stock. The corporation makes contributions to the plan over a period of time, and the stock purchase loan is eventually paid off. The value of the plan grows significantly as long as the market price of the stock holds up. Qualified employees are allocated a share of the plan based on their length of service and... 

External financing (loans from hanks or other concerns, issue of stocks and bonds)... 

The effect of high income-tax rates on the cost of capital is very important. In determining income taxes, interest on loans and bonds can be considered as a cost, while the return on both preferred and common stock cannot be included as a cost. Since corporate income taxes can amount to more than half of the gross earnings, the source of new capital may have a considerable influence on the net profits. 

If the annual income-tax rate for a company is 34 percent, every dollar spent for interest on loans or bonds would have a true cost after taxes of only 66 cents. Thus, after income taxes are taken into consideration, a bond issued at an annual interest rate of 6 percent would actually have an interest rate of only 6 X = 4.0 percent. On the other hand, the dividends on preferred stock must be paid from net profits after taxes. If preferred stock has an annual dividend rate of 7 percent, the equivalent rate before taxes would be 7 X = 10.6 percent. 

The cost of new capital obtained from bonds, loans, or preferred stock can be determined directly from the stated interest or dividend rate, adjusted for income taxes. However, the cost of new capital obtained from the issue of common stock is not so obvious, and some basis must be set for determining this cost. Probably the fairest basis is to consider the viewpoint of existing holders of common stock. If new common stock is issued, its percent return should be at least as much as that obtained from the old common stock otherwise, the existing stockholders would receive a lower return after the issue of the new stock. Therefore, from the viewpoint of the existing stockholders, the cost of new common stock is the present rate of common-stock earnings. 

The total investment required for a new chemical plant is estimated at 2 million. Fifty percent of the investment will be supplied from the company s own capital. Of the remaining investment, half will come from a loan at an effective interest rate of 8 percent and the other half will come from an issue of preferred stock paying dividends at a stated effective rate of 8 percent. The income-tax rate for the company is 30 percent of pre-tax earnings. Under these conditions, how many dollars per year does the company actually lose (i.e., after taxes) by issuing preferred stock at 8 percent dividends instead of bonds at an effective interest rate of 6 percent ... 

Well, some of our clients in getting a loan, deposit stock with us or a deed to some property they own. ... 

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