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valuations modeling with respect to the cost of various debt and equity measurements available. Long-term finance alternatives are presented, as are the different
cash dividend is affordable. B) how increases in asset accounts have been financed. C) whether long-term assets are being financed with long-term or short-term financing.
your company? "Enlightened management" (Block-Hirt, 2005) realizes that the only way to maintain a long-term position is to be aware of shareholder values and concerns.
will be healthy in the short term. When this happen or the cash flow is stable it means that this company can be solvent and will meet its cash needs. The cash flow
Submitted by rodbolles on July 17, 2007
Category: Business
Words: 1479 | Pages: 6
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Introduction
Long-Term Financing is used by corporations and companies to finance projects or to create a cash-flow for current business expenses. Savvy business owners consider the costs of long-term financing before taking on more debt. Additionally, more and more businesses take advantage of an investment strategy to ensure a flow of income in the future. The paragraphs below will discuss these long-term financing models as well as other financial strategies a firm may consider when contemplating future income or debt.
Costs of Debt
The cost of debt is measured by the interest rate, or yield, paid to the bondholders. The cost of debt computation may be difficult if the bond is priced at a discount or premium from par value. To determine the likely cost of the new debt in the marketplace, the firm will compute the yield on its currently outstanding debt. This is the rate that investors are demanding today. To find the current yield to maturity on the debt, the trial and error process can be used. This is where the discount rates are experimented until the rate that would equate the current bond price with corresponding interest payments for certain years and maturity payments are determined (Block & Hirt, 2004). The formula to determine the approximate yield to maturity is:
Approximate yield to maturity (Y') = [ Annual interest payment + [ (Principal payment Price of bond) / Number of years to maturity ] ] / [.6(Price of bond) + .4(Principal payment) ]
The yield to maturity is usually given and is not computed in some cases. However, when the bond yield is determined through formula, or given tables, yield must then be adjusted for tax considerations. Yield to maturity indicates how much the corporation has to pay on a before-tax basis. The interest payment of debt is tax-deductible expense. Since interest is tax-deductible, its true cost is less than its stated cost because the government is picking up...
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