Business Finance DQ

Business Finance DQ
INSTRUCTIONS: Write a 150 word response for each discussion topic.
Financial Management, Chapter 14
DQ: WACC
Weighted Average Cost of Capital (WACC) is the amount of estimation pay to a business consist the average after tax rate of business finance, common stock, retained earnings, and so forth. WACC is calculated by multiplying the rate of finance by the appropriate weight and sums up products. Sheridan Titman, John D. Martin, and Arthur J. Keown (2014) states “…WACC as the weighted average of the estimated after-tax costs of the firm’s debt and equity capital: Weight Average Cost of Capital (WACC) = [(After-tax Cost) * (Proportion of Capital Raised by Debt (wd)] + [(Cost of Common Stock (kcs) * (Proportion of Capital Raised by Common Stock (wcs)].”
WACC is a more appropriate discount rate when doing capital budgeting because businesses can use WACC to estimate the investment in projects and assess risk.
Reference
Titman, Sheridan; Keown, Arthur J.; Martin, John D. (2014). Chapter 14: The Cost of Capital. ISBN: 9780133423822. Pearson Education. Retrieved July 2, 2014, from pg446

Financial Management, Chapter 15
DQ: Debt Ratio
Debt Ratio is the money borrowed organizations take to finance their resources. Therefore, the debt ratio is a financial structure that is funded through liabilities. Sheridan Titman, John D. Martin, and Arthur J. Keown (2014) stated, “A higher ratio indicates a greater reliance on non-owner financing or financial leverage and more financial risk taken on by the firm.”
Debt Ratio = Total Liabilities/Total Assets
By calculating the debt ratio, organizations can see an estimation of how much they have to pay off their overall debts and liquidity. The market value of an organization focuses on the cost of the organization. The market value is the equity after paying off organizational debts from their non-operating cash and near cash investments (Titman, Keown, Arthur, 2014, pg. 483).
Class- In which ways would the Debt Ratio be helpful as a manager?
Reference
Titman, Sheridan; Keown, Arthur J.; Martin, John D. (2014). Chapter 15: Capital Structure Policy. ISBN: 9780133423822. Pearson Education. Retrieved July 3, 2014, from pg483-484
Basic Finance, Chapter3
DQ: Underwriting
When investment bankers certify a sale they make a commitment to raise investment capital from investors on behalf of firms that issue securities. In return underwritings then purchase the securities to then sell them out to the public. “By agreeing to buy the securities, the underwriters guarantee the sale and bear the risk associated with the sale. If the investment bankers are unable to sell the securities to the general public, they must still pay the agreed-on sum to the issuing firm” (Mayo, 2012, pg. 37). Since underwriting is associated with various risks, in some cases investment banks do not want to first handedly entail the risk of the sale and they will then sell the securities through a best efforts agreement, which means that the bankers do not underwrite the sale and therefore they are not signifying that a sale will completely be made. Since majority of new securities are underwritings, pricing securities is crucial. For instance, if the first offer price is too vast the syndicate, which is a group of brokerage houses that collaborate to underwrite, will be unable to sell the securities. If this occurs, what are the investment bankers two options that they can take?
Mayo, H. B. (2012). Basic finance: An introduction to financial institutions, investments, and management (10th ed.). Mason, OH: South-Western.?
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