Strategic Corporate Finance Essay Example | Topics and Well Written Essays - 1250 words

St stridegic Corporate Finance - Essay ExampleQuite simply, the presentors as well as have their own set of motivations and would only be willing to invest in a sights equity or debt if it meets with their required rate of return. They may be willing to take a risk in investing in a particular firm if the returns from this are higher than that expanded by US Treasury bonds with one year to maturity. Since the rate of return on these bonds are guaranteed by the US Government, they are thought to be a riskless investment, assuming that the US Government will neer default on payment of the principal and interest on the due dates. Consequently in financial circles, the market rate on such US bonds is known in common parlance at the risk free rate. The investors could put their money into such an investment and rest assured that they would earn this rate of interest without too a good deal worry at all. Therefore in order to induce the investor to invest in the equity or debt of a particular corporation, that firm or business must offer a higher rate of interest. Investors know that they can increase the return on their investment by taking a chance on more risky securities than the US Treasury bonds, but how much risk they are willing to take is an individual decision depending on the companys departed performance, its financial stability and the actions and business acumen of its management. It in any case depends on the sales of the companys products and the viability of their future day plans. In any event, the investor can pull out his investment by selling the shares or bonds in the open marketplace at the going rate on any business day. In the suit of stocks or equity investment, he can stand to gain or lose in follow of capital gains (current price per share versus the price at which he had originally purchased them) and dividends paid out (usually declared on a per share basis as well). In the case of bonds or debt securities, he gets a fixed r ate of return called interest and can also expect his principal repayment on the date of maturity of such instrument. Usually we find that bonds are being offered at a rebate in the debt marketplace which means below their par or face comfort. In this case the investor also stands to gain because he pays less than the face value for these bonds but can expect their full value to be paid back on the maturity date. Determining the Cost of Equity Capital chthonic Different Theories To summarize, from the foregoing we have seen that the investor has certain requirements which he hopes will be met by investing in more risky securities than US Treasury Bonds or risk free investments. He will nearly likely make a decision to invest after looking at the companys financial performance, its history of share prices and dividend payouts in recent years. Much also depends on the sales of the companys products and the viability of managements future plans. However from a theoretical standpoint , we have three assorted theories that seek to explain the reasoning behind an investment decision. These are (1) the Dividend Growth model (2) the Capital summation Pricing Model and (3) the Arbitrage Pricing Theory. Let us now look at individually of these in turn. The Dividend Growth