Summerfuel FinanceClass 9: 7-20-2016

Today Stock ReportsThe Cost of Capital

Debt vs. EquityWork on Your Business

Plans

Stock Reports Today 1.Kaan2.Gonzalo 3.Francisco 4.Gabriel5. Mathilda6. Niki7. Nasia

The Cost of CapitalThe Right Side of the Balance SheetWhat is going to cost you to to fund your business

Debt vs Equity

Debt – typically less expensive

Driven by the interest rate environment The specific company’s perceived riskiness to

lendersTax deductible

EquityMore difficult to quantify Investors perceived potential return vs the

perceived risk

DebtCost of Debt= Rate*( 1- tax rate)

Company's that issue debt /bonds need to obtain a credit rating Standard & Poor’s, Moody’s, Fitch, others

Current Rateshttp://online.wsj.com/mdc/public/page/2_3022-bondbnchmrk.html

For your projects assume that you are a AA company and your cost to borrow starts at 3.26%

It will then be determined by the market Your company's perceived riskiness vs other

companies Debt to Equity Ratio Cashflow, Profitability etc.

Credit Ratings

The Cost of EquityThe return your company needs to provide to attract equity investors.

A formula: Cost of Equity = rfr + beta * ( emr – rfr)

The risk free rate + the company’s beta x (the expect market rate – the risk free rate

1. Risk free rate : 10 year US Treasury = 1.6 %

2. Beta of 1.1 for a start up / more volatile

3. The market rate=- S&P 500 index ytd = 6%

1.6% + 1.1 (6%-1.6%) = 6.44%

For your projects assume this as a start

Business Plans TodayContinue building your

organizational plan Build out your Beginning

Balance Sheet For groups decide who will do

what

Balance Sheet1. Make a complete list of the stuff that you need to

run your business

2. Start with an assumption that you need 10% to 20% $ of your total assets as cash

Liabilities and Equity

3. Assume that you have 25% of your total assets to put into your company

4. You need to raise the other 75% though either debt or equity

Business Plan Outline1. Executive Summary2. Part I: The Organizational Plan3. Part II: The Marketing Plan4. Part III: Financial DocumentsWork on In Class : Tuesday & Wednesday

this week, Monday next weekPresent next Tuesday and Wednesday

You will get out of this what you put into it !