Capital Budgeting Process
Whilst deciding whether to issue bonds, organizations undergo a sequence
of steps. The six steps encompass:
The first step is deciding whether the organization makes the
appropriate choice by issuing the bond (Maniac & Angie, n.d). It entails
conducting an organization’s financial assessment to reveal areas
whereby funds ca be redirected.
Selecting an underwriter is the second step. It is an investment bank
which determines bonds’ specifics. It entails maturity of the bond,
interest rate charged, as well as the price.
Inviting other underwriters to take part in issuing the bonds is the
third step (Maniac & Angie, n.d). This step involves forming a
syndicate, whereby additional investment firms are invited to take part
in the deal by the lead manager.
Writing and submitting a registration statement to the United States
Securities and Exchange Commission (SEC) follows. Organizations issuing
bonds are necessitated to present a registration statement containing a
catalogue outlining bonds’ price as well as the uses of the money
Pricing the bonds entails setting the prices of the bonds to be issued.
Organizations are required to present the ultimate prices to the Trade
Reporting and Compliance Engine (TRACE) (Maniac & Angie, n.d).
Marketing the bonds encompasses completing a questionnaire that allows
organizations to be entitled for bonds services. These include
depository and distribution.
The last step is depositing bonds to underwriting syndicates and
distributing funds. The role is handled by the Lead Manager.
Leasing has various purposes some of which include the following.
Paying for an asset as it makes profits
Paying for equipment use
To reduce the income tax of an organization. This enables the
organization to gain from the outlay.
Establishing leases as per the capability of the organization to pay.
To enable the organization to employ equipment, which respond to its
requirements, without investing.
The two major kinds of leases encompass operating and finance leases. A
finance lease is whereby the finance organization possesses the asset
the whole time (Coyle, 2000). Besides, a set period of time is covered
by the agreement. It is termed as the asset’s entire economic life. On
the other hand, under an operating lease, the funding of the entire
value of an asset is not done by the lessee (Coyle, 2000). Further, it
does not complete the entire economic life. An example of operating
lease is contract hire in motor finance.
Short-term borrowing involves financial obligations which should be
accomplished in a period of one year (Shannon, Reilly & Schweihs, 2000).
It is employed for working capital needs, or daily business operations.
On the other hand, long term financing is a kind of financing lasting
for over one year (Shannon, Reilly & Schweihs, 2000). Mostly it is
employed to buy assets including machinery, plant, and building, as well
as funding the development of projects.
No-profit healthcare organizations obtain their equity finances from
various sources including government grants, funds generated within the
organizations, philanthropy, and selling real estates together with
additional office buildings.
The capital budgeting process includes various techniques encompassing
net present value, internal rate of return, payback period, equivalent
annuity, and profitability index. The process also involves obtaining
assets which are new to the organization, and substituting subsisting
outdated asset to sustain efficacy.
The types of discounted cash flow methods encompass the following.
Equity approach which includes flows to equity technique (FTE) (Klammer,
Ansari & Bell, (2000). It entails discounting the available cash flow to
the owners of equity capital.
Entity approach that includes adjusted present value technique (APV). It
entails discounting the cash flow prior to permitting debt capital.
In Weighted average cost of capital approach (WACC), a weighted cost is
derived from capital acquired from different sources (Klammer, Ansari &
Bell, (2000). The acquired discount rate is employed in discounting
project cash flows.
Coyle, B. (2000). Leasing. London: Chartered Institute of Bankers.
Klammer, T., Ansari, S. L. & Bell, J. (2000). The Capital Budgeting
Process. New York: Irwin McGraw-Hill.
Maniac, J. & Angie, K. Y. (eds) (n.d). How to Issue Corporate Bonds.
Retrieved from http://www.wikihow.com/Issue-Corporate-Bonds
Shannon, P., Reilly, R. F. & Schweihs, R. P. (2000). Valuing a Business.
McGraw-Hill Professional. McGraw Hill.
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Capital Budgeting Process