GE 301_Module7_Capital Financing.pdf

8/21/2019 GE 301_Module7_Capital Financing.pdf

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GE 301

ENGINEERING ECONOMY

CAPITAL FINANCING

Engr. Andrei Michael A. Fonac


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EQUITY CAPITAL

Equity or ownershi

p capital/funds are those supplied by the owners of an ent

erprise in the expectation thawill be earned.


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BORROWED CAPITAL

Borrowed capital/fund are those supplied

by others a fixed rate of interest must be paid and the debt repaid at a

specified time.


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TYPES OF BUSINESS

ORGANIZATIONS

1. SOLE PROPRIETORSHIP2. PARTNERSHIP

3. CORPORATION


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SOLE PROPRIETORSHIP

Also known as Individual Ownership

It is the simplest form of business organization, wperson uses his or her own capital to establish a busis the sole owner.


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SOLE PROPRIETORSHIP

Advantages:1. It is easy to organize.

2. The owner has full control of the enterprise.

3. The owner is entitled to whatever benefits and pro

accrue from the business.


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SOLE PROPRIETORSHIP

Disadvantages:1. The amount of equity capital, which can be accum

limited.

2. The organization ceases upon the death of the ow

3. It is difficult to obtain borrowed capital, owing to tuncertainty of the life of the organization.

4. The liability of the owner for his debts is unlimited


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PARTNERSHIP

It is an association of two or more persons for the puengaging in a business for profit.


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PARTNERSHIP

Advantages:1. More capital may be obtained by the partners poo

resources together.

2. It is bound by few legal requirements as it to its acprocedures, tax forms, and other items of operatio


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PARTNERSHIP

Advantages:

1. More capital may be obtained by the partners pooresources together.

2. It is bound by few legal requirements as it to its acprocedures, tax forms, and other items of operatio

3. Dissolution of the partnership may take place at anby mere agreement of the partners.

4. It provides an easy method whereby two or more of differing talents may enter into business, each cthose burdens that he can best handle.


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PARTNERSHIP

Disadvantages:

1. The amount of capital that can be accumulated is limited.

2. The life of the partnership is determined by the lindividual partners. When any other partner

partnership automatically ends.

3. There may be serious disagreements among the ipartners.

4. Each partner is liable for the debts of the partnersh


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CORPORATION

It is a distinct legal entity, separate from the individown it, and which can engage in almost any type of transaction in which a real person could occupy hherself.


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CORPORATION

Advantages

1. It enjoys perpetual life without regard to any chanperson of its owners, the stockholders.

2. The stockholders of the corporation are not liabldebts of the corporation.

3. It is relatively easier to obtain large amounts of mexpansion, due to its perpetual life.

4. The ownership in the corporation is readily transfe

5. Authority is easily delegated by the hiring of mana


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CORPORATION

Disadvantages

1. The activities of a corporation are limited to thoseits charter.

2. It is relatively complicated in formation and admin

3. There is a greater degree of governmental cocompared to other types of business organizations


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CAPITALIZATION OF A

CORPORATION

It is acquired through the sale of stock.

There are two principal types of capital stock:

1. COMMON STOCK

2. PREFERRED STOCK


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COMMON STOCK

It represents ordinary ownership without special guarof return.


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COMMON STOCK

Common Stockholders’ Legal Rights:

1. Vote at stockholders meeting

2. Elect directors and delegates to them power to coaffairs of the business

3. Sell or dissolve the corporation

4. Make and amend the laws of the corporation5. Subject to government approval, amend, or change th

of the capital structure

6. Participate in the profits

7. Inspect the books of the corporation


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PREFERRED STOCK

Preferred stockholders are guaranteed a definite divtheir stocks.

In case the corporation is dissolved, the assets mustto satisf y the claims of the preferred stockholder

those of the holders of the common stock

Preferred stockholders usually do not have the right tmeetings, but not always.


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FINANCING WITH BONDS

BONDA bond is a certificate of indebtedness of a corporatiofor a period not less than ten years and guarantmortgage on certain assets of the corporationsubsidiaries.

Bonds are issued when there is need for more capital for expansion of the plant or the services rendered bycorporation.


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BOND

FACE VALUE is the money amount the bond will be

its maturity, and is also the reference amount the bouses when calculating interest payments.

COUPON RATE is the rate of interest the bond issue

on the face value of the bond, expressed as a percent


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BOND

COUPON DATES are the dates on which the bond is

make interest payments. Typical intervals are annualannual coupon payments.

MATURITY DATE is the date on which the bond wil

and the bond issuer will pay the bond holder the facethe bond.

ISSUE PRICE is the price at which the bond issuer o

sells the bonds.


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BOND

CATEGORIES OF BONDS:

1. Corporate Bonds – issued by companies

2. Municipal Bonds – issued by states and municipalit

3. Treasury Bonds – for more than 10years to mature

4. Notes –

1-10years to mature5. Bills – less than one year to mature


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BOND

CLASSIFICATION OF BONDS1. Registered bonds

2. Coupon Bonds


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REGISTERED BONDS

The name of the owner of this bond is recorded on thbooks of the corporation and interest payments arthe owner periodically without any action on his part.


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COUPON BONDS

They have coupon attached to the bond for eachpayment that will come due during the life of the bowner of the bond can collect the interest surrendering the coupon to the offices of the corporaspecified banks.


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METHODS OF BOND RETIREM

1. The corporation may issue another set of bonds the amount of bonds due for redemption.

2. The corporation may set up a sinking fund inperiodic deposits of equal amount are ma

accumulated amount in the sinking fund is equamount needed to retire the bonds at the time due.


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BOND RETIREMENT BY SINKIN

FUND

= ℎ = ℎ

= ℎ

=

= ℎ =


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FUND

= , %,

=

1 1


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FUND


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EXAMPLE M7 1

A bond issue of P200,000 in 10-year bonds paynominal interest in semiannual payments, must be rthe use of a sinking fund that earns 12% comsemiannually. What is the total semiannual expense?

SOLUTION:


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SOLUTION:

= 200,000

= .

= 0.08

=

= 200,000 0.08 = 16,000

=

+ −

= 200,000

.

+.

∗−

= 5,436.91

= 16,000 5,436.92

= 21,436.92


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BOND VALUE

It is the present worth of all future amounts that are to be received through ownership of the bond.

= ,

= (

=

=

= ℎ


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BOND VALUE


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EXAMPLE M7 2

A man wishes to make 14% nominal interest comsemiannually on a bond investment. How much shman be willing to pay now for a 12%, P10,000-bondmature in 10 years and pays interest semiannually?

SOLUTION:


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SOLUTION:

= 10,000

= 1 −∗

= 10,000 1 .

−∗

= 2,584.19

=

= .

= 0.06

= 10,000 0.06 = 600

= − + ∗

= 600− +

.

.

= 6,356.41 =

= 2,584.19 6,35

= 8,940.60


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EXAMPLE M7 3

A P1,000-bond which will mature in 10 years and witrate of 8% payable annually is to be redeemed at pend of this period. If it is sold now for P1,030, deteryield at this price.

SOLUTION:


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SOLUTION:

= 1,000

= 1,030

= 0.08

=

= 1,000 ∗ 0.08 = 80

= 1 −

= 1,000 1 −

= − +

= 80

− +

=

1,030 = 1,000 1

80

− +

solve for i:

= 0.0756

= 7.56%


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EXAMPLE M7 4

A corporation sold an issue of 20-year bonds, havinface value of P10,000,000 for P9,500,000. The bointerest at 16%, payable semiannually. The companto establish a sinking fund for tiring the bond issuemake semiannual deposits that will earn 12%, comsemiannually. Compute the annual cost of this bond.


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SOLUTION:

SEMI-ANNUALLY ANNUALLY


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SOLUTION:

= 10,000,000

= .

= 0.08

=

= 10,000,000 0.08

= 800,000

= + ∗−

= 800,000+

.

∗−

.

= 123,809,572.50

= 10,000,000

= 123,809,572.50

= 133,809,572.50

1

= 1

1 .

= 1

= 0.1236

= + −

133809572.5 = +

= 1,781,107.64


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EXAMPLE M7 5

A company has issued 10-year bonds, with face P100,000 in 1,000 units. Interest at 16% is aid quarteinvestor desires to earn 20% compounded quartewould the selling price have to be?

SOLUTION:


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SOLUTION:

= 100,000

=

.

= 0.04 =

= 100,000 0.04 = 4,000

= − + ∗

= 4,000− +

.

∗

.

= 68,636.35

= 1 −∗

= 100,000 1 .

= 14,204.57 =

= 68,636.35 14,

= 82,840.92


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REVIEW PROBLEMS

RPM6.1 The cost of equipment is P500,000 and the coinstallation is P30,000. If the salvage value is 10% of thof equipment only at the end of 5 years, determine thvalue at the end of the fourth year. Use straight line m


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REVIEW PROBLEMS

RPM6.2 An engineer bought an equipment for P500

spent an additional amount of P30,000 for installaother expenses. The salvage value is 10% of the firsthe book value at the end of 5 years will be P291,5straight line method of depreciation, compute the uof the equipment in years.


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REVIEW PROBLEMS

RPM6.3 A broadcasting corporation is purchased eq

for P53,000 and paid P1,500 for freight and delivery cthe job site. The equipment has a normal life of 10 ya trade-in value of P5,000 against the purchase oequipment at the end of the life. If the corpoinvesting, which is equal to the depreciation usinfund, to a bank having a rate of 6%, what will binvestment of the firm?


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REVIEW PROBLEMS

RPM6.4 A machine cost P7,350 has a life of 8 years a

salvage value of P350 at the end of 8 years. Deterbook value at the end of 4 years using constant-percedeclining value.


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REVIEW PROBLEMS

RPM6.5 An equipment costs P500,000 and has a salva

of P25,000 after its 25 years of useful life. Usindeclining balanced method, what will be the book valequipment at the end of 8 years?


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REVIEW PROBLEMS

RPM6.6 A company owns an equipment costing P90,0

8 years it will have estimated salvage value of compute for the book value at the end of 5 years usin(i=0.06)


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REVIEW PROBLEMS

RPM6.7 A machine costs P300,000 with a salvage

P15,000 is expected to last for 28,500 hours in a peyears. In the first year of service, it was used for 800Compute for the book value at the end of the first yea


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REVIEW PROBLEMS

RPM6.8 Mr. ABC bought a bond having a face value o

for P2500. The bond rate was 12% nominal andpayments were made to him quarterly for a total of 5the end of the fifth year, he sold the bond to a friend that resulted a yield of 9% nominal on his investmewas the selling price?

GE 301_Module7_Capital Financing.pdf

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