Capital Financing and Allocation - Debt Capital
8 important questions on Capital Financing and Allocation - Debt Capital
Explain capital financing and capital allocation
- Capital financing is the obtaining of capital funds from investors and lenders.
- Capital allocation is investing of these funds in equipment tools and other resources.
Decision by a company to implement an engineering project involves the expenditure of current capital funds to obtain;
- Economic benefits
- Meets safety
- Regulatory
- Other operating requirements
How are capital financing and capital allocation linked to each other, what is the goal?
- Economic growth;
- Improved competitiveness;
- Higher grades + faster learning
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When seeking to obtain new capital for investment how can a company attract new investors?
Debt capital | One source of capital is borrowed money, in what [3] ways can it be attained?
- Loaned by banks;
- Sale of bonds | Contract between 2 companies;
- Debentures | Bond not backed by collateral (security for lending);
On what does the attractiveness of a bond depend?
- Interest rate offered;
- Perceived riskiness of the offering
What is tax deductibility?
The interest that borrowers pay is tax-deductible. Generally, this should be considered in engineering economic analysis of the capital investment. What are [2] ways to accomplish this?
- Compute interest during each year and deduct it from the project cash flows before computing incomes taxes and net to consider the interest and principal reductions.
- Modify the cost of debt to account for its tax deductibility in the interest rate MARR/WACC
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