FIN4 CASE, SLP, Thread Discussion

Module 4 - Home

Capital Budgeting with Funding Sources

Modular Learning Outcomes

Upon successful completion of this module, the student will be able to satisfy the following outcomes:

•Case ◦Explain to another how you would handle the qualitative elements of capital budgeting.

◦Demonstrate the use of the basic concepts behind Discounted Cash Flow Valuation, Net Present Value, Payback Period, Discount Rate, Time Value of Cash Flow, Return on Investment.

◦Apply the decision numerical analysis to get a net present value as your basis of making a decision.

◦Describe fine Capital Budgeting process.

◦Describe the various sources of capital for today's organization.

•SLP ◦Explain to another how you would handle the qualitative elements of capital budgeting.

◦Describe fine Capital Budgeting process.

◦Discuss the advantages and disadvantages of each source.

•Discussion ◦Describe the fine Capital Budgeting process.

◦The student should prepare and submit a self-reflective essay.

Module Overview

Capital Budgeting

The financial manager must make a choice. New projects come along all the time. The financial manager always hopes to be in positions where s/he must choose between interesting and profitable projects. Of course this is not always the case. Nonetheless, the financial manager must choose.

In this module we will be working on precisely how a financial manager makes these tough decisions. But before we begin there are some things you need to know.

Please go the Internet, the glossaries referred to in modules 2 & 3, and your own resources and read up on the following concepts. If you do not understand them you will not be able to make the managerial decisions required in this module. As always, if you have any questions, please ask.

Please refresh your memory on the following concepts:

•Capital Budgeting

•Discounted Cash Flow Analysis

•Net Present Value

•Payback Period

•Discount Rate

•Time Value of Cash Flow

•Return on Investment

It is essential that you understand these concepts before you go forward.

Funding Sources

In the previous topic we worked on capital budgeting, i.e., how do we decide which project to do? Now we are working on the next question: Once we decide which project to do, how do we get the funds to do it?

Welcome to the wonderful world of "Where do we obtain the cash we need to run this organization?" You cannot be a financial manager if you do not have financial assets to manage. Any organization has needs for cash investment. This topic explores the sources, advantages, disadvantages, and structuring of these investments.

There are many sources of capital in today's market that will not be discussed in this module. Frankly, the capital market is developing derivations of the traditional capital sources at a very rapid rate. Many of these derivations have severe market limitations and are, in fact, short lived. Thus, we will concentrate on the stable and continuing sources of capital.

There are two classifications of sources for capital that we will examine: current versus non-current and debt versus equity. These two classifications naturally lead to a matrix:

Current Non Current

Debt

Suppliers and Vendors

Lines of Credit

Current Notes Payable

Mortgage Payable

Notes Payable

Bonds Payable

Equity

This is a very rare classification.

Occasionally shareholders will make current loans to the organization.

Common Stock Issued

Preferred Stock Issued

Retained Earnings

We will limit our discussions in this module to the nine "bulleted" items in the matrix. Other instruments are used but they are all derivations of these nine and share most of the same advantages and disadvantages.

Current vs. Non-Current