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Problem Solution Gene One. Long-Term Financing Long- term financing strategies
are used by financial managers to insure that funds ...
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Submitted by performance on April 14, 2008
Category: Business
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Long-Term Financing
Long- term financing strategies are used by financial managers to insure that funds invested today will increase in value or stay the same over a stated period of time. This document will compare and contrast the capital asset pricing model (CAPM) and discounted cash flow method (DCF). The debt and equity mix are intended to enable an organization to capitalize on investments. The debt and equity mix will be reviewed as will the characteristics of the financial market and debt and equity instruments. Long-term finance options will be analyzed.
Valuation Models
The Discounted Cash Flows Model (DCFM) and the Capital Asset Pricing Model (CAPM) are examples of estimation tools used to determine present securities values through the time value of money. DFCM uses simple discounting of projected cash flows over the life of the security, while CAPM uses a more complicated formula. Both methods apply to individual securities and help investors to decide investment risk choices; however, CAPM also "turns finding the efficient frontier into a doable task, because you only have to calculate the co-variances of every pair of classes, instead of every pair of everything" (Moneychimp, n.d.). The CAPM thereby gains the investor more information about a wider range of securities than the DCFM provides.
DFCM uses either the internal rate of return (IRR) or the net present value (NPV) method to calculate present values of future cash flows. Both these methods use standard present value tables to calculate present value equivalencies, so they are simple if the proper tools are available. The IRR finds yield, and its formula divides the present value of the investment by the annuity:
(Investment) / (Annuity) = x
Then, find the value of x in the Present Value of an Annuity table (Block & Hirt, 2005, p. 642) to determine the applicable period and percentage. The NPV finds present dollar value of cash flows. NPV uses...
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