rate of return --- max 700 words for rewriting (excluding reference)....

Rate of Return for Stocks and Bonds

In this week's assignment, the rate of return of equity and debt are calculated. These factors are imperative when it comes to financial decision making with the capital budgeting process. Understanding these calculations will provide an understanding of the effects of dividends, capital gain, inflation rates and how the nominal rate of return affects valuation and pricing. Stock valuation, total return, CAPM, WACC, and flotation costs listed in a separate document cost will be applied to the requested calculations. Through these calculations, a company can better understand how the impact of debt and equity has on their capital structure. These concepts will also allow financial managers within an organization to make sound investment decisions when determining whether or not to invest in a particular project during the capital budgeting process. The summary will be based on the calculations that were performed. The rate of return of equity will help to understand what the effects are of dividends, capital gains, and inflation rates (Tegarden, 2018).

Capital Asset Pricing Model (CAPM)

CAPM ordinarily measures an affiliation between the hazard and anticipated return of a stock portfolio. Utilizing the capital resource estimating demonstrate is exceptionally useful for companies to utilize to make budgetary choices since it portrays the relationship between the hazard and anticipated return for a specific resource ("Investopedia", 2018).This covers how much of a return a company can expect to see on a risk-free investment as well as how much compensation they need to be able to take on any additional risk. Therefore, companies can use this model to determine if the investment should be made or not and a rate of return for the stock of only 13.4% companies would not be likely to make the investment for such a small return.

Weighted Average Capital Cost (WACC)

The weighted normal fetched of capital is utilized to calculate the taken a toll of capital for a firm by proportionately weighing each category of capital (Tegarden, 2018). It provides a measure similar to the CAPM, which the correct discount rate on cash flow and it also provides the rate of interest of capital. Many financial managers used this measure to make investment decisions while finding the correct capital structure for their company. In the WACC portion of the calculation assignment, we were asked to find the WACC which is the weight of equity within the capital structure multiply by the cost of equity times the inverse of the tax rate plus the weight of debt within the capital structure multiply by the cost of debt. By determining WACC, financial managers can analyze the value the project. The expected rate of return of WACC can be used to determine the risk and the capital structure of the company's existing assets. This expected rate of return can then be used to calculate NPV to either accept or reject a project (Tegarden, 2018).

Flotation Costs

These costs are obtained by freely exchanged companies when they issue unused securities that often include fees such as underwriting, legal, and registration fees (Investopedia.com, 2018). Organizations build capital in two different ways: loans and bonds, or equity. Few organizations choose discharging bonds or achieving a credit, especially when intrigued rates are or maybe more (Investopedia.com, 2016). Investopedia.com moreover states "The distinction between the taken a toll of value and the fetched of unused value is the buoyancy taken a toll. The floatation fetched is a rate of the issue cost and is joined into the cost with a lessening" (Qatar Financial Center, 2014).

Conclusion

In conclusion, Investing and financing are two ways that companies make financial decisions. Both are crucial parts of a business decision-making process. Investments are made in to increase capital on assets to produce the highest return for an organization over a period of time. Not all investments made will produce the intended results, but the financial team will calculate an expected return to make an educated guess as to how the return will be on an investment if the investment occurs multiple times. Financing is also a very important part of the decision making process. Making the right financing decision for the company can provide a pretty good indicator on how well the company will do with future operations. Overall, investing and financing are both very fundamental aspects of the financial decision-making process of a company.

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