Long Term Financing

Long Term Financing

Running head: LONG-TERM FINANCING








Long-Term Financing
University of Phoenix






Long-Term Financing
The cost of capital “is determined by computing the costs of various sources of financing and weighing them in proportion to their representation in the capital structure” (Block and Hirt, 2005 p. 331). Any firm that wishes to expand must first determine these costs and apply the best possible combinations of finance alternatives to meet its goals. The following report to Sun Microsystems’s management team will compare and contrast the asset pricing model to the discounted cash flows model, evaluate the firm’s debt/equity mix and dividend policy, describe the characteristics and cost of various debt and equity instruments and evaluate long-term financing alternatives available to Sun.
Capital Asset Pricing Model and Discounted Cash Flows Model
The capital asset pricing model (CAPM) is a valuation tool used by financial analyst to determine a theoretical appropriate rate of return for an asset. In its basic form the CAPM shows a linear relationship between returns on individual stocks and stock market returns over time. This approach uses the least squares regression analysis and is able to relate the risk-return trade-offs of individual assets to market returns. The formula used to calculate these returns is: Kj = alpha + beta x Km + e; where Kj is the return in individual common stock of a company, alpha is the intercept on the y axis, beta is the coefficient, Km is the return on the stock market, and e is the error term for the regression equation. (Block and Hirt, 2005) “This equation uses historical data to generate the beta coefficient; a measurement of the return performance of a given stock versus the return performance of the market” (Block and Hirt, 2005, p. 343).
The discounted cash flows model (DCFM) is another key valuation tool used to determine the value of a project, company or an asset using the concept of...