Financial Options PaperEssay Preview: Financial Options PaperReport this essayRunning head: Financing Option PaperFinancing Option PaperIntroductionThis paper discusses various methods available to organizations when seeking financing for special projects, namely a Casino / Resort hotel complex with a projected budget of $600M. The various methods described include the analysis of capital valuations modeling with respect to the cost of various debt and equity measurements available. Long-term finance alternatives are presented, as are the different sources of capital available to organizations. The paper concludes with a look at various cash management techniques needed by the Casino / Resort for operating as well as the various methods of short-term financing.
Capital Valuation ModelsCapital modeling provides common metrics for risk and reward analysis that can be used to compare the risk-adjusted profitability and the relative cost of capital for a wide range of capital sources. Modeling capital allows one to evaluate the overall capital adequacy in relation to the risk tolerances and profile of your business segments. To properly analyze risk, management needs to consider how they will determine and fund an adequate level of economic capital for a business venture, such as a Casino / Resort hotel complex. There is a need to develop an economic valuation methodology and model that is consistent and comprehensive.
The intent of this capital analysis is to assist with performance assessment and decision-making. You will need to develop scenarios focusing on various sources of capital you intend to pursue. It is necessary to calculate both the weighted average returns of your capital scenarios, and the expected rate of return your investors will demand for the individual debt and equity instruments you are considering as capital sources.
One model that should be considered is the Capital Asset Pricing Model (CAPM). It is a formula based set of calculations used to model expected returns for equity. The general concept behind CAPM is that investors require compensation for both the time value of money and the risk incurred. The time value of money is represented by the risk-free rate and compensates investors for placing money in your company time. Components of the formula represent risk, and calculate the amount of compensation the investor needs for taking on additional risk. The model uses a risk measure, called beta, which compares the returns of your assets, to the market over time and to the market premium. The model allows you to calculate the expected return on a risk-free security plus a risk premium. If this expected return does not meet the required return then you will not be able to attract capital, and that component of your project is not viable. The model is only as effective as the validity of the data you input with respect to the calculations.
Another model to be considered is the Dividend Discount Model (DDM).This model is another tool for equity valuation. Here, the financial theory states that the value of stock is the worth all the future cash flows expected to be generated, discounted by an appropriate risk-adjusted rate. Dividends are used as a measure of cash flows returned to the shareholder.
These models depend on the validity of the assumptions that are made, and how they are applied to the model being used. For example, DDM is highly sensitive to the assumptions made about growth rates and discount rates. You may need to conduct sensitivity analysis to establish an appropriate result. Keep in mind that these models are a good starting point to begin thinking about the valuation of your sources of capital, but should be used in conjunction with sound business fundamental analysis. What is beneficial in using the models is that it forces you, as future resort owners, to begin thinking about different scenarios in relation to how the market is pricing capital.
These models should be considered to assist with your risk-based capital calculations, in conjunction with your other capital analysis and assumptions. It is imperative that the structure required for capitalization offers the highest return while minimizing your weighted cost of capital.
Various Debt and Equity InstrumentsThere are several debt and equity instruments. These instruments are used to create financing decisions for the firms. The debt instruments are obligations that enable the issuing party to raise funds. Promising to repay a lender in accordance with terms of a contract does this. (Internet Search: Investopedia). Types of debt instruments include notes, bonds, certificates mortgages, leases and other agreements between a lenders and borrowers. The debt instruments allow participants to transfer the ownership of debt obligations from one party to another. Firms issue bonds to finance operations. Debt agreements are quite strict and are often tailored to the need of borrowers business risks.
Various restrictions may include conditions on interest rates or covenants relating to working capital, financial leverage, and capital purchases. A basic principle of financing is that debt is considered riskier than equity, as debt-financing costs have to be met regardless of the companys financial position. (Bharath, K. 2005, p. 62). Costs of debt vary based on types of debts and the credit rating of the company seeking the debt. Costs associated with debt include application fees, standby fees, monitoring fees, and related administration charges. The interest rate is a function of risk and the payment on debt is regarded as a pretax expense. Forms of debt instruments include fixed rate, floating rate, funded or unfunded debt, callable and sinking- fund debt, senior and subordinate debt, secured and unsecured debts, investment grade and junk debt, domestic and international debt, publicly traded debt and private placement instruments.
The Financial Services Act 2003 was created in the face of continued economic growth. It authorized the issuance of mortgages in June 2003, and the issuance of short-term loans in March 2004. The legislation allowed mortgage origination fees, mortgage loan covenants and guaranty agreements.
Under Section 11(e) of the Financial Services Act (Cth) and Federal Financing Act (FAA), mortgage lender companies were permitted to do business with foreign banks as long as the foreign banks provided adequate and satisfactory financing to maintain the existing structure of their mortgage servicer relationships and were registered. Section 6(d)(2) of the FSCI provides for the payment of fees to mortgage lenders as a matter of principle. When a lender provides financing to a foreign bank, only a fee is assessed. This makes it a significant step backward of existing banking services that have been a source of competition among banks. The banking industry has experienced a number of different financial crises. This includes periods of sharp economic downturns, which resulted in a massive increase in consumer borrowing. At one time, a major portion of U.S. households owed more than $500 billion. Today the federal government is in a recession and the Department of the Treasury is seeking new stimulus to combat the economic impact of austerity measures and to stimulate business by financing the recovery. If necessary, banks could request that Fannie Mae and Freddie Mac, as well as the U.S. Treasury, complete the required regulatory compliance and compliance audits of the banks conducted by each.
Section 11(d) requires mortgage lenders to provide a new form of credit, known as a collateralized loan, or a “merger or consolidation.” Loan terms have varied greatly over the years, but the majority of loan collateralization offers is available for pre-retirement interest and principal payments. If a lender can sell the principal of part of the collateralized loan and give the borrower the option to sell off all of the other part before defaulting, for example, investors can receive additional interest of a reduced amount of mortgage debt on the part of the lender that will be repaid. While such a collateralization arrangement provides an incentive (as well as a means of financing) to keep the collateralized loan, the terms change as the interest rates increase, sometimes as much as 2 percent (Cherrini, K., B., & Eibner, F.).
Section 11(d) also defines “merger or consolidation” and limits its scope to a single, relatively limited number of lenders. This provision of the FSCI permits one to consolidate and to purchase the principal of the collateralized loan into a smaller, consolidated company. After the consolidation or sale, the securities are convertible into full-price debt of the lender, which remains the same as collateralized debt. Each lender must also certify that the lender does not have a business relationship with or involvement in a foreign country that violates its laws or practices. If a lender has no business relationship with a foreign country, it may require the foreign company to purchase the collateralized loan at its discretion.
Section 11(d). An institution that is a joint venture involving a foreign lender pursuant to the foreign-liability protection act is not a separate entity, and the agreement does not make it illegal to transfer assets from the co-operative to the joint venture without the consent of a trustee. However, joint ventures must be supervised in the course of the relationship between the co-operative and the bank or financial institutions that are involved. Each state and/or local government has enacted laws mandating that the co-operative be supervised in the course of its relationship with its co-operative in its state or local capacity, and other state statutes prohibiting joint ventures. This section of the FSCI limits
Equity financing relates to share capital required to support operational activities by selling common or preferred stock to individuals or institutional investors. In return for the money paid, the shareholders receive ownership interest in the corporation. Preferred shares have higher claim on assets and earnings of the company. Each company has its own provisions for preferred shares but will generally offer fixed dividends and potential appreciation. In the event of a financial problem, the debt-holders have first priority followed by preferred shareholders, then common stock