Creation and improvement of a system for attracting investments and a mechanism for stimulating the development and implementation of informatization projects;

Development of legislation in the field of information processes, informatization and information protection.

We leave the remaining resources outside the scope of the study.

Despite all the shortcomings, the information and control systems of government bodies can serve as the basis that will ensure the formation of state information resources. This requires solving complex issues related to ensuring the formation and maintenance of government information resources by ministries and departments. This applies primarily to such organizations as:

State Committee of the Russian Federation on Statistics;

Federal Service of Russia for Hydrometeorology and Monitoring environment;

Russian Federation Committee on Geology and Subsoil Use;

State Committee for Sanitary and Epidemiological Surveillance of the Russian Federation;

Ministry of Environment Protection and Natural Resources of the Russian Federation;

Federal Employment Service of Russia;

State Customs Committee Russian Federation;

State Committee of the Russian Federation for State Property Management;

State Tax Service of the Russian Federation.

Differential rent is calculated as the excess of the income of the landowner (lessor) from the sale of land of average and better quality over the income of the owner of the worst land plot:

In the worst area there is no differential rent; in the average and best areas it occurs, and its source is the higher productivity of these areas compared to the worst. When concluding a lease agreement (agreement on the delivery of land for temporary use), the owner of the land seeks to convert all the land

a share of the product sufficient to maintain the capital from which he provides himself with the conditions of agricultural production: seeds, wages and maintenance of livestock and other agricultural equipment, as well as the usual profit in the given area on the capital invested in agriculture.

The landowner seeks to keep for himself all that part of the product (part of the price) that remains above this share as ground rent, which is the highest amount that only a tenant can pay for a given quality of land. At the same time, Smith argues that rent is part of the price of a product in a completely different way than wages and profits. High or low wage and return on capital are the cause of high or low prices; a larger or smaller amount of rent is the result of an established price. Smith also draws attention to the fact that the rent from land varies not only depending on its fertility, but also depending on its location.

A year after the publication of The Wealth of Nations, J. Anderson published his treatise entitled “An Inquiry into the Nature of the Corn Laws,” in which he gave a detailed exposition of the doctrine of rent. Anderson argues that rent is not a reward for nature's labor, but a simple result of the attraction of land. Rent exists because the soil has varying degrees of fertility. Anderson called the premium for the exclusive right to use the land of the best quality as rent. To analyze the regulatory activities trade unions On the market labor... production useful fossil... market labor, in the second - the problems of regulating it activities, and in the third - practical aspect functioning market labor ...

Note also that by investing JD, you are investing at the point where the investment opportunity line just touches the interest rate line and has the same slope. Now the investment opportunity line represents the return on marginal investment, so that JD is the point at which the return on marginal investment is exactly equal to the interest rate. In other words, you can maximize your wealth if you invest in real assets until the marginal return on investment falls to the interest rate. By doing this, you will borrow or borrow from the capital market until you achieve the desired ratio between consumption today and consumption tomorrow.

The rule of the rate of return is to invest until the moment when the marginal return on investment is equal to the rate of return of equivalent investments in the capital market. This moment corresponds to the point of intersection of the interest rate line with the investment opportunity line.

GNI can be considered as limit level payback or return on investment, which is a criterion for the feasibility of making an investment.

IN real life Individuals are not limited to investing in securities in the capital market. They can also purchase equipment, machinery and other real assets. Therefore, in addition to the line depicting the profitability of purchasing securities, we can also draw a line of investment opportunities, which will show the profitability of purchasing real assets. The return on the “best” project may be significantly higher than the return on the capital market, so the investment opportunity line may be very steep. But if the individual does not have inexhaustible inspiration, the line gradually levels out. This is shown in Figure 2-4, where the first $10,000 investments provide a further cash flow of $20,000, the next $10,000. give a cash inflow equal to only $15,000. In economic parlance, this is called the diminishing marginal return on capital.

The internal rate of return is sometimes considered as a limiting level of return on investment, which can be a criterion for the advisability of additional investments in a project.

Note that although the firm continues to grow operating income and makes new investments after the fifth year, these marginal investments do not create any additional value since they earn at the cost of capital level. The straightforward conclusion is that it is not growth that creates value, but the combination of excess returns and growth. This leads to a new perspective on the quality of growth. A firm can increase its operating income at a rapid pace, but if it does so at the expense of large investments at or below the cost of capital, then it will not create value, but actually destroy it.

To calculate present value, we discounted the expected future return at the rate of return Σ yielded by comparable alternative investments. This rate of return is often called the discount rate, marginal rate of return, or opportunity cost of capital. It is called opportunity cost because it represents the income that an investor gives up by investing in a project rather than in securities. In our example, the opportunity cost was 7%. The present value was obtained by dividing $400,000. by 1.07

Risk premiums always reflect the risk contribution of a portfolio. Let's say you are building a portfolio. Some stocks will increase portfolio risk, and you will only buy them if they also increase your expected return. Other stocks will reduce portfolio risk, and so you are willing to buy them even if they reduce the portfolio's expected returns. If the portfolio you choose is effective, each type of investment you make should work equally hard for you. Thus, if one stock has a greater marginal impact on portfolio risk than another, the former should provide a proportionately higher expected return. This means that if you plot a stock's expected return against its marginal risk contribution to your efficient portfolio, you will find that the stocks fall along a straight line, as in Figure 8-8. This is always true: If a portfolio is efficient, the relationship between each stock's expected return and its marginal contribution to portfolio risk should be straightforward. The opposite is also true: if there is no direct relationship, the portfolio is not effective.

As we will show in Part V, the same relationship holds for the real economy. In an economy where there is no government that takes a portion of citizens' income in the form of taxes, equilibrium requires that saving equal investment. Moreover, if this is true, then the return on savings should have a certain relationship with the marginal product of capital - although in the real world the relationship between these quantities is more complex than in the Robinsonade model. Relationship between investment and interest rate When the island economist had the opportunity to earn more by making a loan than he could get at the equilibrium level of saving and investment, he decided to make a loan. This loan was alternative way savings of 50 pineapples, so the economist's total savings remain the same. However, since he agreed to lend 50 pineapples to natural scientists, he abandoned the original plan of pineapple cultivation, i.e., capital investment. He did this because by giving a loan he could get more income. The higher market interest rate (60%) forced the economist to reduce the amount of planned investment.

Interest, being the price paid in any market for the use of capital, tends to such an equilibrium level at which the total demand for capital in this market at a given rate of interest is equal to the total fund (84) entering the market at the same rate of interest. If the market we are considering is small - say, a single city or a single industry in a developed country - the growing demand for capital in that market will be immediately met by a growing supply of capital through inflows from neighboring areas and other industries. But if we consider the whole world or even just one large country as a single capital market, the aggregate supply of capital can no longer be interpreted as changing rapidly and significantly under the influence of changes in the interest rate. After all general fund capital is the result of labor and assumptions, and additional labor (85) and additional assumption, which would be prompted by an increase in the rate of interest, cannot quickly reach any significant value in comparison with labor and abstinence, the result of which is the already existing total fund of capital. Therefore, a widespread increase in the general demand for capital will for some time be associated not so much with an increase in supply as with an increase in the rate of interest (86). This growth will induce capital to partially withdraw from those areas of use where its marginal utility is lowest. Slowly and gradually - this is exactly how an increase in the rate of interest will increase the entire capital fund" (87). "It is never out of place to recall that talking about the rate of interest in relation to old capital investments can only be done in a very limited sense (88). For example, we can apparently say that a capital of approximately 7 billion pounds. Art. invested in various sectors of the English economy at a net interest rate of about 3%. But this way of expression, although convenient and justified for many purposes, cannot be considered strict. What should be said is the following: if the rate of net interest on the investment of new capital in each of these industries (i.e., on marginal investment) is taken to be about 3%, then the total net income generated by the entire mass of capital invested in various industries , and capitalized on a 33-year payback basis (i.e. based on a 3% rate), would be approximately £7 billion. Art. The point is that the value of capital already invested in reclaiming soil, erecting a building, laying a railroad, or making a car is the discounted value of the future earnings (or quasi-rents) expected from it. And if its prospective profitability decreases, then its value will correspondingly decrease, which will now be the capitalized value of this lower income minus deductions for depreciation." (89)

The latter stages of a boom are characterized by an optimistic estimate of the future returns of capital goods, sufficiently distinct to balance the influence of the growing surplus of these goods and the increasing costs of their production, and also, probably, the rise in the rate of interest. The very nature of organized investment markets, dominated by buyers often uninterested in what they are buying, and speculators more concerned with anticipating the next change in market sentiment than with making informed estimates of future returns on capital goods, is such that when a market dominated excessive optimism and excessive purchasing, panic begins, it acquires sudden and even catastrophic force (130). Moreover, fear and uncertainty in the future, which accompany a sharp drop, naturally give rise to a rapid increase in liquidity preference, and consequently, an increase in the interest rate. The collapse of the marginal efficiency of capital, which tends to be accompanied by an increase in the rate of interest, can seriously exacerbate the decline in investment. And yet, the essence of the matter lies in a sharp drop in the marginal efficiency of capital, especially those types of capital whose investments in the previous phase were the largest. Liquidity preference, excluding cases associated with increased trade and speculation, increases only after the collapse of the marginal efficiency of capital.

Let's return to what happens during a crisis. While the boom lasts, many new investments provide good current income. The collapse of hopes comes from sudden doubts about the expected profitability, perhaps because current profits show signs of contraction as the stock of newly produced capital goods continues to increase. If, at the same time, current production costs are regarded as too high compared to what they should be later, there is another reason for the deterioration in the marginal efficiency of capital. Once doubt arises, it spreads very quickly. Thus, in the initial stage of the crisis there will probably be a lot of capital ultimate efficiency which became insignificant or even turned into a negative value. But the period of time that must pass before the shortage of capital due to its use, deterioration and obsolescence becomes quite obvious and causes an increase in its marginal efficiency may be a fairly stable function of the average life of capital in a given period. If the characteristic features of the period change, then at the same time the typical time interval will change. If, for example, we move from a period of population growth to a period of population decline, then the defining phase of the cycle will lengthen. But, as can be seen from the above, there are good reasons why the duration of the crisis should be in a certain dependence on the service life of durable capital property and on the normal growth rate in a given historical period.

Incentives for saving and investment. High marginal tax rates also significantly reduce the rewards for saving and investing. Let's say you set aside $1,000 in savings. at 10% per annum, which gives you 100 dollars. interest income per year. If your marginal tax rate is, say, 40%, your after-tax interest earnings would be reduced to $60, and your after-tax interest rate would be only 6%. In such circumstances, even if you are willing to save (i.e., forego current consumption) if your savings have a 10% return, you might choose to use all of your income for consumption if your savings have only a 6% return.

Let us remember that saving is a prerequisite for investing. Therefore, proponents of supply-side economics propose reducing marginal tax rates on savings. They also call for a lower tax on investment income to encourage people to invest increasing amounts of their savings in the economy. One of the determinants of investment spending is its net after-tax yield.

Let's consider the limiting case when B(t,t) and B(t,t-l) are not equal to zero and the expected time between transactions is approximately equal to the correlation intervals under study, in our case - 5 minutes. The idea is that you don't want to trade too often, otherwise you'll end up paying too much transaction costs. The average return within a single correlation time frame that you can get using this strategy, assuming the order is executed in that 5 minute time frame, is 0.03% (to account for prediction errors, we use a more conservative estimate than scale 0.04% for 1 minute, used previously). Over the course of a day, this gives an average gain of 0.59%, which in a year would be 435% with reinvestment or 150% without reinvestment. Such a small correlation leads to significant income, if transaction costs are not taken into account and there is no slippage effect (slippage occurs as a result of the fact that market orders are not always executed at the price specified in the order due to the limited liquidity of the markets and the time required to execute the order). It is clear that even small transaction costs, as in our case, 0.03% or 3 per 10,000 investments, are enough to destroy the expected profit when trading in accordance with the strategy used. The problem is that you can't trade infrequently to reduce transaction costs, because if you do, you lose the correlation-based forecasting feature that only works within a 5-minute horizon. From this we can draw the following conclusion that the difference correlation is not enough for the strategy described above to be profitable due to imperfect market conditions. In other words, market liquidity and efficiency drive the level of correlation, which is comparable to the absence of near-term arbitrage opportunities.

At the optimum, the return on the marginal investment is exactly as great as the market interest rate. Therefore it is true

IN this section The possibility of using models that link risk and return in relation to real estate investments is being considered. Along the way, we'll discuss whether the marginal investor's highly diversified assumption holds true for real estate investing and, if so, how best to measure model parameters—such as the risk-free rate, beta, and risk premium—to estimate the value of equity. capital We will also look at real estate investment risks that are not adequately addressed in traditional risk and return models, and discuss how to incorporate them into your assessment.

One of the first researchers to estimate the magnitude of the net losses of a monopoly was the American scientist Harberger, who in 1954 calculated the net losses for the US economy (the net loss triangle is often called the Harberger triangle in his honor). He estimates that the net loss in US manufacturing was about 0.1% of US GNP. However, there is a point of view that the amount of net losses in this study is underestimated due to incorrect calculations. In his calculations, Harberger assumed the elasticity of demand equal to 1. But this assumes that the marginal cost of production of goods by a monopolist is equal to zero. The Lerner index was estimated based on data on the deviation of the rate of return on investments in a given industry from the average return on industry. But if part of the industry is monopolized, then the average rate of return will include monopoly profit, and, therefore, its level will be higher than in conditions of free competition. If by normal profit we mean the profit received

Several well-known works of Fisher are specifically devoted to interest: Valuation and interest (I896)9, Norm of interest (907)]a, Theory of interest (1930)". In them, he associated interest primarily with a purely psychological, associated with impatience, preference for present goods for future its expression in agio - the difference in the utility of goods relating to different points in time.In addition, the amount of interest, in his opinion, is influenced by the marginal rate of return on investments, which characterizes investment opportunities.

In cases where the deductibility of interest is not provided, financing from borrowed funds requires the enterprise to obtain a higher pre-tax return on investment than in other cases. If the assumption of diminishing marginal returns to capital is satisfied, this means that in such cases, given the unavailability or limitation of financing, the equilibrium level of investment is set at a level lower than in the absence of taxation. If the tax depreciation rate is lower than the economic depreciation rate, the disincentive effect can be significant. There have been no published studies on economic depreciation rates in the modern Russian Federation. However, the Unified norms of depreciation charges inherited from Soviet times for the complete restoration of fixed assets in the Russian Federation, approved by Resolution of the Council of Ministers of the USSR dated October 23, 1990 No. 1072 and in force until Chapter 25 of the Tax Code came into force, were outdated and did not meet the needs market economy By

It can be assumed that with an increase in the capital stock, the latter ratio should at least not decrease. The second term on the right side of the last expression is equal to half the marginal return on capital, and it is positive if the implementation of the capital investment occurs immediately at the time of capital acquisition. The standard assumption is a decrease

The coefficient is equal to the ratio of net profit from sales to the average annual cost of equity capital. Data for calculation - balance sheet.

It is calculated in the FinEkAnalysis program in the Profitability Analysis block as Return on Equity.

Return on equity - what it shows

Shows the amount of profit that the company will receive per unit of equity capital value.

Return on Equity - Formula

General formula for calculating the coefficient:

Calculation formula based on the old balance sheet data:

Return on equity - value

(K dsk) is essentially the main indicator for strategic investors (in the Russian sense - investors of funds for a period of more than a year). The indicator determines the efficiency of using capital invested by the owners of the enterprise. Owners receive return on investment in the form of contributions to the authorized capital. They donate those funds that form the organization’s own capital and in return receive rights to a corresponding share of profits.

From the perspective of owners, profitability is most reliably reflected in the form of return on equity. The indicator is important for the company’s shareholders, as it characterizes the profit that the owner will receive from a ruble investment in the enterprise.

There are limitations to the use of this coefficient. Income does not come from assets, but from sales. Based on K DSC, it is impossible to assess the efficiency of a company's business. In addition, most companies use a significant proportion of debt capital. As an accounting metric, Return on Equity provides insight into the earnings a company earns for shareholders.

The return on equity is compared with possible alternative investments in shares of other enterprises, bonds, bank deposits, etc.

The minimum (normative) level of profitability of an entrepreneurial business is the level of bank deposit interest. The minimum standard value of the Return on Equity indicator (K dsk) is determined by the following formula:

K rna = Cd*(1-Snp)

• K rnk – standard value of return on equity capital, relative units;
• SD – average rate on bank deposits for the reporting period;
• STP – income tax rate.

If the Kdsk indicator for the analysis period turned out to be lower than the minimum Krnk or even negative, then it is not profitable for the owners to invest in the company. An investor should consider investing in other companies.

To make the final decision on exiting the company’s capital, it is better to analyze K DSC for last years and compare with the minimum level of profitability for this period.

Return on equity - diagram

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Synonyms

More found about return on equity

1. Assessing the premium for a company's specific risks when determining the required return on equity
   TCOE total cost of equity - return on the asset being valued or rate of cost of equity capital Rf - return on the risk-free asset RPm - premium for market risk RPs -
2. Subject-oriented approach to assessing the required return on equity
   The required return on equity is today the most important parameter for making investment decisions in both
3. Valuation of shares and the value of commercial organizations based on a new financial reporting model
   E required return on equity capital SK 0stP extended value of residual profit in the post-forecast period Amount of residual profit
4. Factors of company-specific risks when assessing the premium for these risks in emerging capital markets
   In the future, this will lead to a more adequate assessment of the required return on the company's equity capital, unsystematic risk, taking into account all its risks. Conclusions Operational and financial
5. 
   Return on equity capital Return on equity capital is a coefficient equal to the ratio of net profit from sales to the average annual cost
6. Analysis of capital valuation models
   Almost 80% of companies around the world use this model to estimate the expected return on equity capital. Although CAPM is based on fairly strict assumptions that are unlikely
7. Assessment of the value of an enterprise's equity capital taking into account the financial risk of an investment project
   If the basic and alternative projects have approximately the same level financial risk then the cost of equity for the base project can be taken equal to the return on equity when implementing an alternative project where FRLb is the level of financial risk of the main project
8. How much is the company's equity worth?
   SDR - market return on equity capital % per year β - beta coefficient characterizing the risk of investment in a company
9. Methods for assessing the value of a company in M&A transactions using the example of the takeover of JSC CONCERN KALINA
   CAPM re rf β ERP 1 where re is the expected return on equity rf is the risk-free rate of return β is a measure of systematic risk ERP premium
10. Capital asset valuation model as a tool for estimating discount rates
    Solving equation 3 for ke, we obtain the return on equity from which it will then be necessary to subtract the risk-free rate. So, if we take the level
11. Income Statement Analysis - Part 2
    Profit after interest 200 130 80 Return on equity 10% 13% 8% Return on equity will be calculated as the ratio of profit after interest
12. Return on equity
    Synonyms return on equity capital return on equity capital is calculated in the FinEkAnalysis program in the Profitability Analysis block as Return on equity capital
13. 
    
14. Two contours of interests in the company’s financial health policy
    Required return on equity capital Amount of equity capital employed The company is characterized as operating effectively within
15. Calculation of key financial indicators of business performance
    WACC To find the cost of equity capital, we calculate the rate of return on equity capital using the CAPM 4 capital asset valuation model. Moreover, the data
16. Assessing the efficiency of using an enterprise's own and borrowed capital
    According to the methodology for analyzing the return on equity capital using the effect financial leverage profitability can be presented as follows
17. Risk premium cancels depreciation and multiplies prices
    In Russia and abroad, methods for assessing the value of property of the equity capital of a business based on the income method imply the use of the capitalization rate by the cumulative construction method with
18. 
    Dj value of the jth source of borrowed investment capital r 1, 2, 3, n number of sources of equity investment capital j 1, 2, 3, m - number of sources of borrowed investment capital rd - minimum rate of return on borrowed investment capital re - minimum rate of return on equity investment capital The system of equations must be solved for D E or rd re
19. 
    Alpha will get into trouble financial position for this reason, also zero Return on equity, taking into account the influence of financial leverage, will be 20% 20% 20% - 12% X
20. Methods for determining the discount rate when assessing the effectiveness of investment projects
    The rate of return on equity can be calculated using the long term asset pricing model WACC is used in

Capital is a value that produces a stream of income. From this position, capital can be called both securities and human capital, And production assets enterprises.

However, in the factor market, capital is understood as production assets. It is a resource used to produce more goods and services.

Manufacturing capital is divided into basic And negotiable. Working capital is spent on the purchase of funds for each production cycle: raw materials, basic and auxiliary materials, labor.

Fixed capital is real durable assets. It serves for several years and is subject to replacement (reimbursement) as it wears out physically and mentally. In this regard, the owner of fixed capital carries out depreciation deductions.

A return on capital will be generated only if the owner of the capital transfers it for productive use to an entrepreneur (or becomes an entrepreneur himself). Thus, it is income derived from the market for goods and services.

Loan interest(interest - i ) is the price paid to the owner of capital for the use of his funds for a certain time.

Let us assume that the market interest rate i=10%. An entrepreneur can borrow funds and pay them back after a certain period plus 10%. But the company can also use own funds, if any. In this case, the company refuses the opportunity to lend these funds to another borrower at 10%. Thus, it makes no difference whether the company uses its own or borrowed funds. Possible investment costs in both cases are equal to 10%.

The interest rate depends on supply and demand borrowed money. Demand dk depends on the profitability of entrepreneurial investments, the size of consumer demand for credit, demand from the state and organizations. The lower the interest rate, the higher the demand for capital.

But capital is acquired in order to increase production with its help. From here - marginal return on capital:

MRP k =MR·MP k .

As investment funds increase, it tends to decrease, which is associated with the law of diminishing returns to factors of production.

In this regard, the curve MRP k coincides with the demand curve dk(as well as in the labor market).

The greater the scale of capital investment in a country, the less (other than equal conditions) return from them or profitability of production. This was first noted by D. Ricardo, then by K. Marx and A. Marshall. Therefore, in capital-rich industrialized countries, the level of return on capital may be lower than in less developed countries.

In addition to the downward trend in interest rates under conditions perfect competition When capital migrates between different industries, it tends to level out. The opportunity cost of various capital investment projects is equalized.

Subjects capital supply (S k) are households that save. The higher the interest rate, the more S k. At the same time, capital owners refuse alternative uses of their own capital (open their own business, buy land plot and etc.).

The greater the amount of capital offered for loan, the greater its marginal opportunity cost or marginal opportunity cost (marginal opportunity cost – M.O.C. ) – hence the curves s k And MOC k match up.

The result of the interaction of demand and supply of capital is equilibrium and the establishment of an equilibrium price of capital - i e.

Rice. 6.6. Equilibrium in the capital market

At the equilibrium point, the marginal return on capital coincides ( MRP k) And marginal cost missed opportunities ( MOC k). The demand for loan capital coincides with its supply.

There are nominal and real interest rates. Nominal shows how much the amount that the borrower returns to the lender exceeds the amount of the loan received. Real – adjusted for inflation.

Among other things, the interest rate depends on the degree of risk (who is the borrower?), the maturity of the loan (short-term, medium-term or long-term), the size of the loan, etc.

The company uses the funds received to investment (Inv) .

A profit maximizing firm expands investment until M.R. will not be equal M.C. , i.e. the marginal return on investment will not equal the sum of all marginal costs.

Marginal rate of internal return(r– rate – norm) is pure marginal income as a result of investment, expressed as a percentage of each additional invested monetary unit (or return on additional investment as a percentage):

r=(MR-MC)/MC.

Difference between marginal internal return on investment r and interest rate i called marginal net return on investment . Until r not less i, the firm can earn additional profit if i more r, there is no point in investing. Thus, the profit-maximizing level of investment is the level at which r=i .

Rice. 6.7. Firm equilibrium: r=i

The curve designated as the “marginal rate of internal return” also shows the firm’s demand curve for funds for investment, i.e. it coincides with dk.

Limit cost increases as more and more funds are attracted and shows how much investment can be made without changing the target capital structure

The efficiency limit of additional capital attraction from the standpoint of the level of its weighted average cost. It characterizes the increase in the value of capital in comparison with the previous period. The marginal cost of capital is calculated using the formula:

where PSK is the marginal cost of capital;

Increase in the weighted average cost of capital;

Increase in capital amount.

By comparing the marginal cost of capital with the expected level of profitability for business operations that require additional attraction of capital, it is possible in each specific case to determine a measure of the effectiveness of such operations (primarily this applies to investment operations).

The assessment of the cost of capital should be completed by developing a criterion indicator of the effectiveness of its additional attraction. Such a criterion indicator is marginal efficiency of capital. This indicator characterizes the ratio of the increase in the level of profitability of additionally attracted capital and the increase in the weighted average cost of capital. The marginal efficiency of capital is calculated using the following formula: PEC = ΔРк/ΔССК, where PEC is the marginal efficiency of capital; Δ Рк - increase in the level of return on capital; ΔССК - increase in the weighted average cost of capital.

The stated principles of assessment make it possible to form a system of basic indicators that determine the cost of capital and the boundaries of its effective use.

Among the indicators considered, the main role belongs to the weighted average cost of capital indicator. It develops at the enterprise under the influence of many factors, the main of which are:

The average interest rate prevailing on financial market; availability of various sources of financing (bank loans; commercial loans; own issue of shares and bonds, etc.);

Industry Features operational activities, which determine the duration of the operating cycle and the level of liquidity of the assets used;

The ratio of operating room volumes to investment activities;

Enterprise life cycle;

The level of risk of ongoing operating, investment and financial activities.

These factors are taken into account in the process of targeted management of the cost of equity and debt capital of the enterprise.

Question 19. CAPM model and corporate β-coefficient.

The CAPM model (Capital Asset Pricing Model: a model for assessing the profitability of a financial asset, or a financial asset pricing model) is a quantitative method for comparing the risk associated with an asset and its profitability. Purpose of applying the method: the CAPM model allows you to predict the profitability of a financial asset (iozh); in turn, knowing this indicator and having data on the expected income for this asset, you can calculate its theoretical (forecast, internal) value. For this, the basic formula of the capitalization method is used: V = I / R, where R = iozh + of; iozh – expected, or required, profitability; of – rate of return of capital. The CAPM model is a quantitative method for assessing the return on investment in an asset in comparison with the market return using the β coefficient, which indicates the coincidence of the trends in the price of a given (analyzed) security with the average trend in the prices of securities for a group of enterprises. The basic formula of the CAPM model: iozh = ibezr + β×(imarket - ibezr), where ibezr is the risk-free rate of return; imarket – expected market rate of return. The coefficient β in the CAPM model is a measure of systematic (improper, market) risk of this asset. In general, for the securities market the β-coefficient is equal to one. For individual companies̆ it varies, as a rule, from 0.5 to 2.0.

CAPM model. Most important characteristic This model is that the expected return of an asset is linked to the degree of its riskiness, which is measured by the β-coefficient. In order to understand how prices of financial assets develop, it is necessary to construct a model. The valuation model for common shares will look like this.

Кs = Кrf + (Км – Кrf) β

Ks is the price of ordinary shares as a source of financing.

Кrf – risk-free return on securities.

Km is the market value or required return of the securities portfolio.

(Km – Krf) – market risk premium.

β is a coefficient characterizing the measure of variability of the company’s shares relative to the average stock price on the market.

Most often, it is recommended to use interest on long-term government obligations as a risk-free rate of return.

β-coefficient reflects the level of variability of a particular securities in relation to the average and is a criterion for earnings per share compared to the average income in the securities market.

Question 20. Weighted average (WACC) and marginal (MCC) cost of capital

weighted average cost of capital, WACC) is used in financial analysis and business valuation. The total price of capital is the average of the prices of each source in the total capital. The indicator characterizes the relative level of the total cost of providing each source of financing and represents weighted average cost of capital

where is the share of the source in the cost of capital of the company and its profitability (price).

The weighted average price of capital (WACC) is determined for a specific period of time, based on prevailing economic conditions. This is based on the following assumptions:

1. the market and book values ​​of the company are equal;

2. the existing structure of the used sources of financing is acceptable or optimal and should be maintained in the future.

The marginal cost of capital (MCC) refers to the cost of attracting an additional unit of capital. The relationship between current and future assessments cost of capital corporations provide using the indicator (Marginal Cost of Capital, MCC). It characterizes the increase in the amount of each new unit of it, additionally attracted into economic circulation. Marginal cost of capital expresses the costs that the company will have to incur to reproduce the required structure capital under current financial market conditions. For example, a corporation plans to implement a new investment project for the development of oil and gas fields. To do this, it is necessary to attract additional sources of financing, which can only be obtained on the financial market. In this case, the forecast cost of capital, which will be considered extreme, may differ significantly from current market valuations. Calculation marginal cost of capital(MSS) is carried out according to the formula;

MCC = ∆WACC/∆Cap