Financing in today’s market appears to be short term. There are many methods that can be used to plan for the future of a company. Long-term financing has a combination of factors that will assist a company in their future. The issue with long-term financing is the plan has to be managed correctly with present financing. There are many factors that need to be researched and assessed: capital asset pricing, discounted cash flow, debt/equity mix, dividend policy, cost of debt/equity instruments, and long-term financing alternatives. These factors help determine the present financing methods of a company, how funds are used and distributed, and how much debt-to-equity a company has. All of these factors play a significant role in long-term financing.
Capital Asset Pricing Model
Investments are associated with some form of risk, when investing your looking to minimize the risk and maximize the return. For investors the Capital Asset Pricing Model comes in play with two methods the time value of money and risk. The time value of money compensates the investor for the initial investment over a certain period of time. The second part of the CAPM is compensating the investor for taking on more risk to make it attractive for investing in certain businesses. The CAPM helps the investors calculate if the investment should be undertaken based on the risk and the expected rate of return of the investment. The negative aspect of the CAPM is that it does not take into consideration the taxes and costs associated with buying and selling of the stocks. It also considers that all investors have the same goals in consideration with the return on the investment.
Discounted Cash Flow Model
Anytime you plan to invest money into anything you have to take into account the discount cash flow model. The discount cash flow model is what someone is willing to pay today in order to receive the anticipated cash flow in the future. (Value Based...