Explain how large companies raise capital from the equity and bond markets. Discuss the relevance of the capital asset pricing model ( CAPM) to company seeking evaluate its cost of capital - Essay Example

Comments (0) Cite this document
Summary
At stage 1, the firm has to take certain preliminary decisions such as quantum of money to be raised, type of securities, type of bid; competitive or negotiated…
Download full paperFile format: .doc, available for editing
GRAB THE BEST PAPER96.3% of users find it useful
Explain how large companies raise capital from the equity and bond markets. Discuss the relevance of the capital asset pricing model ( CAPM) to company seeking evaluate its cost of capital
Read TextPreview

Extract of sample "Explain how large companies raise capital from the equity and bond markets. Discuss the relevance of the capital asset pricing model ( CAPM) to company seeking evaluate its cost of capital"

Download file to see previous pages The firm has to decide whether to raise funds through common stock, preferred stock, bonds or hybrid securities or a combination. In the case of common stock, the firm has to decide whether it should it be rights issue or public issue.
The company can put on offer its block of securities for sale to the highest bidder or negotiate a deal with the investment banker. Since in the latter, the investment bankers should carry out a substantial investigation, they would do it for best known companies. Otherwise, the prohibitive costs and uncertainty of clinching the deal would make the bidding for lesser known companies unattractive for the investment bankers. Therefore, only the very large companies, about 100 of the largest companies in New York stock exchange have a choice of seeking competitive bidding for their offering. Others have only an option of negotiated deal with an investment banker.
In case of a negotiated deal, the firm has to select an investment banker. Most of the investment banks operate in niches. For instance, older and larger veteran merchant bankers such as Morgan Stanley deal mainly with IBM, AT&T and Exxon and such and Drexel Burnham Lambert deals with speculative issues. Some investment bankers have penchant for new issues, while some others with a conservative brokerage client base would not take up speculative and risky issues.
In Stage 2, the firm’s initial decisions will be revisited by the merchant banker. For instance, the merchant banker, after studying the environmental trends, may recommend and convince the management to change their earlier plan of raising $200 million by selling common stock to raising $100 million by common stock and the rest by the issue of bonds.
In this stage, the firm and investment banker will come to a conclusion as to whether the banker will work on the best efforts basis or will underwrite the issue. In the best efforts basis, the banker does not assume ...Download file to see next pagesRead More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Explain how large companies raise capital from the equity and bond Essay”, n.d.)
Explain how large companies raise capital from the equity and bond Essay. Retrieved from https://studentshare.org/miscellaneous/1558949-explain-how-large-companies-raise-capital-from-the-equity-and-bond-markets-discuss-the-relevance-of-the-capital-asset-pricing-model-capm-to-company-seeking-evaluate-its-cost-of-capital
(Explain How Large Companies Raise Capital from the Equity and Bond Essay)
Explain How Large Companies Raise Capital from the Equity and Bond Essay. https://studentshare.org/miscellaneous/1558949-explain-how-large-companies-raise-capital-from-the-equity-and-bond-markets-discuss-the-relevance-of-the-capital-asset-pricing-model-capm-to-company-seeking-evaluate-its-cost-of-capital.
“Explain How Large Companies Raise Capital from the Equity and Bond Essay”, n.d. https://studentshare.org/miscellaneous/1558949-explain-how-large-companies-raise-capital-from-the-equity-and-bond-markets-discuss-the-relevance-of-the-capital-asset-pricing-model-capm-to-company-seeking-evaluate-its-cost-of-capital.
  • Cited: 0 times
Comments (0)
Click to create a comment or rate a document

CHECK THESE SAMPLES OF Explain how large companies raise capital from the equity and bond markets. Discuss the relevance of the capital asset pricing model ( CAPM) to company seeking evaluate its cost of capital

Capital asset pricing model

...? and Section # of Capital Asset Pricing Model is a tool extensively used to value assets in the financial sector. It has been extensively used in calculating the required return of investment products. The capital asset pricing model was introduced in the 1960s by William Sharpe; since then it has been considered as the cornerstone of predicting the required return on an investment. Required Return: Risk free rate + ? (Average Market Return –Risk free rate) Where ? is the beta value of the financial asset The basic assumptions of this...
1 Pages(250 words)Essay

Capital Asset Pricing Model

...Capital Asset Pricing Model Purpose of the Paper: The purpose of the paper is to understand and workout the cost of equity of a given company. The cost of equity of a company is associated with risk associated in investing in that company. Higher the risk associated in equity investment, higher will be the cost of equity for shareholders. Capital asset pricing model can be employed to work out the cost of...
5 Pages(1250 words)Research Paper

Capital Asset Pricing Model

..., this theoretical model can be effectively employed to determine the capital structure by identifying the best combination of debt, equity, and hybrid securities to finance the corporation’s assets (Swanson et al 2003). Although majority of the corporate applications of this model are still debated, no other potential alternative approaches are there to replace CAPM. Conclusions In total, the capital asset pricing model (CAPM) is of great value in a wider range of corporate applications ranging from simple project investment analysis to merger analysis....
7 Pages(1750 words)Essay

CAPM (Capital Asset Pricing Model)

...Africa majority of the surveyed respondents preferred instruments like government bonds and Treasury bill (Nel, 2002). Limitations of CAPM Model The limitations of this model are as follows: 1. The CAPM model is very unrealistic for an average investor as they are more interested in the company related risk and not market related risk. Data like past performance of the company, dividend, equity valuation model etc is more important to the average investor (Rai University, n.d). 2. The assumptions in the CAPM model are...
7 Pages(1750 words)Essay

Capital Asset Pricing Model

...?Discuss the main theoretical limitations of the CAPM. The Capital Asset Pricing Model (CAPM) is a model that shows the relationship between risk of an asset and its expected return. Its major limitations stem from its methodological assumptions. One of the assumptions it makes relates to the relative volatility of investment. The CAPM model therefore relies on the ability to measure market volatility as a whole. With several possible investments available in the market,...
4 Pages(1000 words)Assignment

Capital Asset Pricing Model

...are unrealistic and at some instances inapplicable to capital budgeting. Despite these claims, the arguments presented including the comprehensive discussion of CAPM and the cash flow is sufficient to underline the general contention that CAPM supports the use of discounted multi-period risky cash flow. References Benninga, S. (2000). Financial Modelling, Second Edition. Cambridge, MA: The MIT Press. Black, F., M. Jensen, and M. Scholes. (1972). The Capital Asset Pricing Model: Some Empirical Tests. "Studies in capital theory markets." Bogue, M. and R....
10 Pages(2500 words)Research Paper

Disscuss the relevance of the capital asset pricing model (CAPM) to a company seeking to evaluate its cost of capital

...). The CAPM’s focus is on the method of measuring systematic risk and its effect on the required return and share prices. Though it was initially evolved for investment in equity, it is also used for evaluating company investments in capital projects now (Davis & Pain, 2002). Capital Asset Pricing Model (CAPM) attempts to bring out a linkage between risk and return for the assets (Gitman,2006). The CAPM is built on the premise that well diversified investors dominate the stock market...
3 Pages(750 words)Essay

Disscuss the relevance of the capital asset pricing model (CAPM) to a company seeking to evaluate its cost of capital

...CAPM Model in Evaluating Cost of Capital Whenever a company invests in a new project or when an investor invests in some shares, there is always some risk involved (unless the investment is made in risk-free securities such as “gilts”). However, a company can also reduce its overall exposure to such investment-related risk if it invests in a number of projects with the view that even if the more risky projects perform badly, the less risky projects will cover up for the loss, resulting in an average return from the portfolio that is pretty much closer to what company expects i.e....
2 Pages(500 words)Essay

Capital Asset Pricing Model

...Capital Asset Pricing Model Introduction CAPM stands for capital asset pricing model (CAPM) which is used for relating the risk and the associated trade-offs with market returns. The security price is associated directly with cost of the capital. However the interest rates can be used in relation to the cost of capital while beta is used as a proxy for the level risk. These calculations are popular among investment practitioners. CAPM is a sub-division...
8 Pages(2000 words)Essay

Capital asset pricing model (CAPM)

...the risk-free rate is in equal relation to the systematic risk. In this regard, the higher the beta of a security, the higher will be the expected return of that particular asset (Sharpe, 1964). In the following years, economists have critically reviewed the published theory of CAPM and its application in reality after comparing the actual returns with the expected returns. The CAPM model is still widely used by companies as an efficient model for computing cost of capital (Ko) on the basis of explanation that securities with higher betas offer higher return. CAPM has...
7 Pages(1750 words)Essay
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.

Let us find you another Essay on topic Explain how large companies raise capital from the equity and bond markets. Discuss the relevance of the capital asset pricing model ( CAPM) to company seeking evaluate its cost of capital for FREE!

Contact Us