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 ultimate efficiency 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 in the 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

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

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 of the 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 wages and profits on capital cause 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 ...

BOOK FOUR

INCENTIVE TO INVESTMENT

I define with the price of his offer. ultimate efficiency

. It follows that incentive to invest depends on

It's important to understand

The volume of investment is influenced two types of risk A. The first one is

lender's risk third type of risk

the future influences the present

CHAPTER 15

BOOK FIFTH

CASH WAGES AND PRICES

CHAPTER 20 Busy Function

There are two reasons why the replacement of the ordinary supply curve by an employment function is in complete agreement with the methods and purposes of this book. Firstly , occupancy function expresses the phenomena that interest us in the units we have chosen without involving any other units of measurement, the quantitative determination of which is doubtful. Secondly , this function is more suitable than the usual supply curve for analyzing the problems of industry and production as a whole, as opposed to the problems of a particular industry or an individual company, for which external conditions are assumed to be given and unchanged.

Thus, inevitable price volatility cannot affect activities of entrepreneurs, but only funnels existing random wealth into the pockets of a lucky few. This fact has gone unnoticed in some contemporary debates about price stabilization policies. In a society subject to change, such a policy cannot be entirely successful.

We have shown that if effective demand is insufficient, then underemployment occurs in the sense that there are unemployed people who would be willing to work for less than the existing real wage. As effective demand increases, employment increases while maintaining existing real wages or even lowering them, until a point is reached where there is no longer a surplus of labor to be used based on the then established level of real wages. In other words, it will no longer be possible to obtain an additional number of people unless money wages begin to rise faster than prices.

However, the significance of this finding is limited by a number of practical caveats.

1. rising prices may mislead entrepreneurs and induce them to increase employment beyond the level at which their individual profits, measured in units of output, become maximum. In other words, at the new price level, they may underestimate the marginal cost of use.

2. an increase in prices will lead to a redistribution of income to the benefit of the entrepreneur and the disadvantage of the rentier, and this may affect the propensity to consume. However, this process can not only begin when full employment has already been achieved, but will be continuous throughout the time that costs increase.

The visible asymmetry between Inflation and Deflation may cause some confusion. While deflation of effective demand below the level required for full employment will reduce both employment and prices; inflation above this level will only affect prices. This asymmetry is simply a reflection of the fact that wage-earners always able to refuse work on a scale at which real wages fall below the marginal burden of labor for a given level of employment, they are not able to demand the provision of work on a scale at which real wages do not exceed the marginal burden of labor at a given level of employment.

CHAPTER 21 Price Theory

I consider it wrong to divide Economic Science into the Theory of Value and Distribution, on the one hand, and the Theory of Money, on the other. The true boundary must lie between the Theory of a Single Industry or a Firm, which examines the remuneration of factors and the distribution of resources between various ways of using a given quantity of them, and the Theory of Production and Employment in general.

Possible complications that will actually affect the course of events:

1) effective demand will not change in exact proportion to the quantity of money;

2) since resources are not homogeneous, there will be diminishing rather than constant returns as the degree of their use gradually increases;

3) since resources are not equal in their degree of efficiency, the supply of some goods will be inelastic when there are still unused resources suitable for the production of other goods;

4) the wage unit will tend to increase before full employment of all resources is achieved;

5) the remuneration of the funds included in the marginal costs of production will not change in the same proportion.

The increase in effective demand will be spent partly on increasing the rate of resource utilization and partly on raising the price level. Thus, instead of constant prices in the presence of unused resources and prices rising in proportion to the amount of money in conditions of full use of resources, we practically have prices gradually increasing as the employment of factors increases. That's why Price Theory , i.e. Analyzing the relationship between changes in the quantity of money and changes in the price level in order to determine the elasticity of prices in response to changes in the quantity of money must address the five complicating factors listed above.

1. A change in the quantity of money affects the amount of effective demand by influencing the interest rate. If the matter were limited to this, then the quantitative effect could be derived from three elements: a) the schedule of liquidity preference; b) a graph of marginal efficiency, and c) an investment multiplier.

2. The presence of diminishing or constant returns depends on whether whether employees are remunerated strictly in proportion to their productivity. Thus, an increase in output will be combined with a rise in prices, regardless of even any change in the unit of wages.

3. If it were available perfect balance in relative quantities of specialized unused resources, then the point of full use would be reached for all of them simultaneously. As production increases, a series of bottlenecks will arise when supply individual goods already ceases to be elastic, and their prices will rise to the level necessary to switch demand to other goods and services.

The general price level will not rise very much as output increases as long as there are still efficient unused resources of all kinds. But as soon as production volume increases so much that bottlenecks begin to appear, we can expect a sharp rise in prices for some goods.

4. The upward trend in the wage unit may appear even before full employment is achieved. A proportion of any increase in effective demand will be absorbed by the upward trend in the wage unit.

Thus, in addition to the final critical point of full employment, with the achievement of which money wages must rise in response to an increase in effective demand expressed in monetary units in the same proportion as the prices of goods purchased with wages increase, we have a consistent series earlier semi-critical points, upon reaching which an increase in effective demand will also cause an increase in money wages, although not in exact proportion to the increase in the prices of goods purchased with wages.

5. The remuneration rates of different factors, expressed in terms of money, will exhibit varying degrees of inflexibility, and these factors may also have different elasticities of supply in response to changes in the monetary remuneration offered. If not for this, then the price level would be determined by two factors: the unit of wages and the size of employment. The most important element of the marginal cost of production, which will vary in a different proportion than the unit of wages and fluctuate over a much wider range, is the marginal cost of use.

The long-run relationship between national income and the quantity of money will depend on liquidity preferences, and the stability or volatility of prices in the long run will depend on the intensity of the upward trend in the unit of wages relative to the rate of growth in the efficiency of the production system.

BOOK FOUR

INCENTIVE TO INVESTMENT

CHAPTER 11 Marginal efficiency of capital

I define marginal efficiency of capital as a value equal to the discount rate that would equalize the present value of a series of annual incomes expected from the use of capital assets during their service life, with the price of his offer. If for some time there is an increase in investment in any this type capital, its ultimate efficiency decreases as investment increases , - because the expected income will fall with an increase in the supply of this type of capital, because,

llllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllan increased load on the capacity for the production of the corresponding capital goods will causing an increase in their supply price. Capital efficiency depends on the expected return on capital, not just its current return.

Thus, for each type of capital, we can construct a graph showing how much investment in this type of property must increase during a given period in order for its marginal efficiency to fall to any given value. It follows that incentive to invest depends on schedule of investment demand and the interest rate.

It should be noted that the expectation of a fall in the rate of interest will have a downward effect on the marginal efficiency of capital schedule, since it means that output from equipment manufactured today will have to compete for some part of its life with output from equipment that is efficient and has lower net revenues. This expectation will not have a large depressive effect, since ideas about future interest rates on loans of different terms will be partly reflected in the aggregate of rates in force today. But some depressive effect is still possible, since products released towards the end of the service life of currently produced equipment may will have to compete with products produced by newer equipment corresponding to a lower rate of return due to the decline in the rate of interest in the periods following the end of the service life of the equipment currently produced.

It's important to understand the dependence of the marginal efficiency of a given capital fund on changes in expectations, for it is precisely this dependence that mainly determines the susceptibility of the marginal efficiency of capital to the rather sharp fluctuations that explain the economic cycle. A series of successive rises and falls can be described and analyzed in connection with the fluctuations of the marginal efficiency of capital relative to the rate of interest.

The volume of investment is influenced two types of risk A. The first one is risk of the entrepreneur or borrower , arising from doubts about whether he will actually be able to receive the expected income he is counting on. If a person puts his own money at stake, then we are talking only about this type of risk.

Where there is a system of borrowing and lending money, by which I mean the making of loans on real security or on the good name of the borrower, there is a second kind of risk - lender's risk . It can be associated either with doubt about the debtor's honesty, i.e. with the danger of deliberate bankruptcy or other attempts to evade fulfillment of obligations, or with the possibility that the amount of security will be insufficient, i.e., with the danger of involuntary bankruptcy due to unjustified calculations of the borrower. One could also add here third type of risk - one that is associated with the possible a change in the value of a unit of the monetary standard, as a result of which a money loan is to a certain extent a less reliable form of wealth than real property. The first type of risk represents, in a certain sense, necessary social costs, although they can be reduced both through mutual equalization of risk and by increasing the accuracy of foresight. But the second type of risk is a net addition to the cost of the investment that would not exist if the lender and borrower were one and the same entity.

The marginal efficiency of capital schedule has fundamental importance, because mainly through this factor (much more than through the interest rate) the expected the future influences the present. The erroneous definition of the marginal efficiency of capital as the current income from capital equipment (this would be true only in a static situation where there is no changing future that could affect the present) led in theory to a severing of the connection between the present and the future. Even the rate of interest is essentially a short-term phenomenon; and if we reduce the marginal efficiency of capital to the same situation, we deprive ourselves of any possibility of directly including the influence of the future in the analysis of the existing equilibrium.

It is precisely because of the existence of long-life equipment in the field of economics that the future is linked to the present. Therefore our general principles thinking corresponds to the conclusion that calculations for the future must have an impact on the present through the prices of demand for equipment with a long service life. The scale of investment depends on the relationship between the rate of interest and the schedule of the marginal efficiency of capital, which relates this value to the size of current investments, and the marginal efficiency of capital reflects the relationship between the supply price of capital property and its expected income.

Households supply capital resources (including in the form of borrowed money). The demand for capital comes from business.

Figure 5.2 Demand for capital

The vertical line shows the marginal product of capital and its price, and the horizontal line shows the volume of demand for capital. The demand curve for capital shows that as capital increases, the marginal product or marginal return on capital (MRP K) decreases. This is how the law of diminishing returns manifests itself. The marginal product of capital (MP K), like the marginal product of other factors of production, is the increase in output per unit of increase in a given factor. Marginal product of capital in monetary terms (MPR K) is additional revenue from the sale of additional product received from this unit.

Figure 5.3 Capital supply

The vertical axis represents the price of capital (R) and the marginal opportunity cost (MOC), and the horizontal axis represents the supply of capital (S K). The slope of the curve is positive because as the amount of capital supplied increases, opportunity costs increase. Subjects of capital supply refuse other alternative opportunities to use these funds. This is how the law of increasing opportunity costs manifests itself. The more capital supplied, the greater its marginal opportunity cost.

Let's connect both graphs.

Figure 5.4 Equilibrium in the capital market

Equilibrium in the capital market is established when the volumes of its supply and demand are equal. The equilibrium price of capital is formed (R E, point E). The price of capital is interest. Equilibrium price of capital (equilibrium interest) is the point at which:

· Marginal return capital and marginal opportunity cost

MPR K = MOC (5.7)

· Demand for capital and its supply

For the subject of the offer, interest acts as income. For the subject of demand for capital, interest acts as a cost. Consequently, interest can be considered both as an element of factor income and as an element of costs.

The origin of interest is usually explained on the basis of the so-called time preference. Time preference is a feature of the behavior of market economy subjects who prefer today's goods and value them higher than future goods. Consequently, in order to induce the owner of capital to refuse the current disposal of capital, it is necessary to reward him for this refusal (the theory of abstinence, which considers interest as a fee for waiting or a fee for abstinence). On the other hand, an economic entity that gets the opportunity to use borrowed funds now, rather than wait until it can accumulate them on its own, must pay for this opportunity.

Capital resources are formed from that part of household income that is not spent on consumption, that is, saved. However, households do not offer the entire volume of savings and not the entire volume of income in the form of borrowed funds.

Households choose:

between current and future consumption;

· between savings as such and investment (between hoarding and investment).

At the same time, an economic subject (both a rational consumer and a rational producer) strives to maximize utility from present and future consumption. The consumer rationally allocates his funds and income in such a way as to maximize the total utility received throughout his life.

Saving decisions are made based on household life cycle circumstances:

· income level of a given time period;

· level of expected future income;

· savings at the beginning of a given time period.

Therefore, the consumption problem can be viewed as an intertemporal choice problem. At any given moment, the individual determines the utility of his consumption program based on his entire expected future life. Thus, the value of utility depends on the quantities of goods consumed in each period of its life cycle.

Let's consider how the value of capital (equilibrium price) is determined.

The value of capital now depends on what capital can produce in the future. To produce income, the owner of capital must give up current consumption in anticipation of a higher reward in the future (future income stimulates today's stock).

Present future consumption can be viewed as two consumption goods. This makes it possible to construct indifference curves (time preference curves), which show an individual's set of consumption decisions in the present or in the future.

Figure 5.5 Time preference curves

At the point where the time preference curves touch the current consumption line (horizontal axis), savings are equal to zero (all income is spent on consumption in the present time). Point 2 on the first indifference curve characterizes the behavior of the consumer, in which he decides part Money save. Point 1 illustrates a situation in which the consumer saves even more. But the decision to save a larger amount means greater sacrifices in the form of giving up current consumption.

Refusal from current consumption is done in the hope of receiving a larger amount in the future. The more a consumer gives, the more they hope to receive in the future.

A consumer's ability to save is determined by the level of his intertemporal budget constraint.

The intertemporal budget constraint is the difference between a consumer's income and his current consumption.

The intertemporal budget constraint shows the possibility of assigning current consumption to the future. The slope of the intertemporal budget constraint line is characterized by the size of the interest rate. The higher the interest rate, the steeper the slope of the budget constraint line and the higher the level of savings a given consumer can afford.

Figure 5.6 Intertemporal equilibrium

The solid straight line on the graph is the given level of the intertemporal budget constraint. Point 1 is the point of tangency between the time preference curve and the intertemporal budget constraint line. This is the point of intertemporal equilibrium. If the interest rate increases, then the budget constraint line changes its slope - and the consumer can decide to save more because he will receive a greater reward.

The equilibrium consumption program maximizes utility given the budget constraint. Depending on whether current consumption is greater or less than current income determines whether the consumer will be a borrower or a lender:

1. Current consumption is less than current income, and future consumption is more than current income - the consumer is a creditor.

2. Current consumption is more than current income, and future consumption is less than current income - the consumer is a borrower.

Thus, consumption can be smoothed over time by borrowing during periods of low income and saving during periods of high income. An individual's consumption is not strictly tied to his current income. The budget constraint line turns into an intertemporal budget constraint curve.

Loan interest rate. The amount of interest is determined on the one hand by the marginal productivity of capital (diminishing), and on the other hand by marginal cost lost opportunities (increasing). The interest rate (rate) is calculated as the ratio of income on loan capital to the amount of loan capital.

The interest rate depends on the following factors:

1. The factor lying within the equilibrium model in the capital market is the ratio of demand and supply of capital.

2. Factors outside the model:

a) degree of risk – as a rule, the relationship is direct;

b) urgency – as a rule, the relationship is direct;

c) loan size – as a rule, the relationship is inverse;

d) level of taxation;

e) the degree of monopolization of the loan market - with a monopoly of lenders the relationship is direct, with a monopoly of the borrower - inverse.

There are nominal and real interest rates. The nominal rate is the current interest rate without taking into account inflation. The real rate is the nominal rate minus the inflation rate.

Investing is the process of creating or increasing capital (investing to increase income). A distinction is made between gross investment (the total increase in capital in a firm or in the economy as a whole) and net investment (gross investment minus funds to compensate for depreciation of capital, that is, gross investment minus depreciation).

Investing and receiving income from investments are separated in time. Therefore, in order to correctly assess the feasibility of investing, it is necessary to compare current and future cash flows. Discounting is used to make intertemporal comparisons of costs and benefits.

Discounting- casting economic indicators future periods to today's period. Discount factor 1/(1+i) t, where i is the discount rate, which is the rate of return on the least risky alternative investment of capital, t is the serial number of the calendar period (the year of investment, if we discount investments, or the year of income, if we discount income). Long time periods are considered as perpetual, and in this case the discount factor takes the form 1/(1+i).

Current discounted value(PDV) is the present value of future income.

PDV=1/(1+i) t *K (5.9)

If we consider the interest rate as a discount rate, then the following statement is true: the lower the interest rate and the shorter the time period, the higher the discounted value of future income.

Investing is only advisable when the expected returns are higher than the costs associated with the investment. Net present value of investment(NPV) is calculated as follows:

(5.10)

CF - income in t years

IC- invested capital

t - number of years, serial number of the year

i - discount rate

The project is feasible when NPV>0.

The internal rate of return on investment is the maximum price of capital that a firm could pay to keep the investment project effective. In the short term it should be equal to interest.

The marginal net return on investment is equal to the marginal internal return on investment minus the interest rate. Therefore, for a profit maximizing firm, it must be zero.

Ground rent

Land rent is a special case of economic rent. Economic rent is payment for a resource whose supply is strictly limited. The term rent comes from the French. rente, transformations lat. reddita – given away. Thus, the fact is stated that part of the income or product produced, for example, in agriculture, is given to the owner of the land.

Types of rent:

1. Absolute

2. Relative

a) first type

b) second type

3. Monopoly rent

All land owners receive absolute rent.

For its analysis, the following prerequisites are introduced:

1. Absolute commodity nature of production. There is no production to satisfy own needs; all products are produced for sale.

2. Land as an economic object is separated from land as an object of ownership. In the agricultural sector, there are land owners who are not engaged in production, and entrepreneurs who are engaged in production but do not have land.

3. The land market is a market of perfect competition.

4. From paragraph 3 it follows that all land plots are of the same quality.

5. All land is used to produce staple food.

Figure 5.7 Land rent

The horizontal axis shows the amount of land, and the vertical axis shows rent. By it we mean the amount of money that tenants pay monthly for each unit of land (1 acre) to the owner of the land.

The supply curve runs perpendicular to the horizontal axis: the quantity of land does not respond to the value indicator. There is as much land as there is. The supply of land is completely inelastic.

The demand curve has a negative slope due to the law of diminishing returns. This law is a special case of the law of diminishing returns to factors of production (diminishing marginal returns, or decreasing marginal productivity).

The intersection of the demand curve D 0 with the supply curve S shows the situation of equilibrium in the land market.

R 0 – level of monthly rent per acre.

The area of ​​the rectangle 0Q*E 0 R 0 - is the total rent for all the land used.

An increase in demand for the product of land will increase the rent per acre from R 0 to R 1. This will increase the total rent to the area of ​​the rectangle 0Q*E 1 R 1 . A decrease in demand for land product will lead to a decrease in rent per acre from R 0 to R 2 and a decrease in total rent to an area of ​​0Q*E 2 R 2 .

If the value of land rent were above the equilibrium level, not all owners would find people willing to rent their land. Consequently, the rent would decrease and owners would begin to compete for tenants. This would reduce the value of the rent to the equilibrium value.

If the value of land rent were lower than the equilibrium value, tenants would not receive the space they require. Consequently, competition, intensified as a result of the limited supply of land, would raise the value of land rent.

Thus, the dependence of absolute rent on changes in demand for land, which is derived from the demand for the product of land, is clearly visible.

Consequently, under conditions of inelastic supply of land, absolute rent depends entirely on changes in demand.

The fact that the owner of the land claims payment for its use is a restriction of access to the land. This money is paid from the income received by the entrepreneur, which reduces his profit and, therefore, reduces the possibility of capitalizing profits. Consequently, the presence of land ownership reduces the efficiency of land management.

Differential rent according to fertility and position. Plots of land vary in fertility level and location.

Let's begin our consideration of differential rent with rent for plots of land different levels fertility. There are three types of land: the best, the average and the worst. With equal investments of capital and labor on plots of land of equal size, different results can be obtained due to differences in the fertility of these plots. Higher fertility leads to higher productivity, obtaining greater results (harvest) at the same cost.

The owner of the worst plot does not receive difrents, the owners of the average and best plot will strive to receive it.

Figure 5.8 Origin of differential rent

It should be noted that the fertility of the land is not a constant value. It can be increased or decreased as a result of management. Natural fertility can be supplemented by artificial fertility.

Additional investments in land can lead to increased yields, that is, to increasing additional returns. However, in this case, when the contract is re-signed, the rent will increase.

Differential rent of the second type. The second form of differential rent is associated with the different efficiency of successive applications of labor and capital (means of production) in the same area. The same land plot may be the object of successive capital investments. The first investment may determine the highest labor productivity, the second - somewhat less, the third - even less. The mechanism of formation of diphrenta is similar to the mechanism of formation of diphrenta of the first type. This differential rent, like the previous one, is withdrawn in favor of the land owner.

Land price determined by capitalizing ground rent. If the purpose of the buyer of land is to obtain income from its use by leasing the land, then determining the price of the land is equivalent to determining its opportunity cost of the land for its owner. The amount spent on the purchase of land could be invested in other ways to generate income. For example, send it to a bank deposit and receive income in the form of interest. The total amount of this income must be equal to the rent received from the land. Therefore, the price of land is the discounted value of expected land rent.

The price of land can be considered as a perpetual investment of capital. Therefore, the standard discounting formula as t tends to infinity turns into the formula:

P l – land price;

R – annual rent

r – loan interest rate

Factors influencing the price of land:

I. Raising:

1. Good location:

a) provision of water;

b) proximity to the sales market;

c) comfortable terrain;

d) provision of infrastructure;

2. Good quality soil.

3. No risk of restriction economic activity requirements for environmental protection, seizure of land for public needs, etc.

4. Favorable prospects for using the site in the future.

II. Downgrades:

1. Location in a protected area.

2. Inconvenient terrain (rugged terrain, location on a slope, high altitude, etc.).

3. Poorly cultivated soil, low fertility.

4. Poor infrastructure.

Rent. Rent is only part rent. The rent includes the following elements:

2. Depreciation for buildings.

3. Interest on invested capital (in the same buildings).

4. Other payments under the agreement.

Investments in land improvement, costs for the construction of buildings, structures on it, and infrastructure lead to the fact that an increasingly larger share of the rent is made up of depreciation and interest on invested capital.

The tenant can also and does make investments in improving the land. Consequently, disagreements arise between him and the owner regarding the lease term. The tenant strives to make investments that will have time to pay off before the rent is raised under the new agreement. The owner seeks to shorten the term of the contract in order to be able to take into account all improvements to the land in the new rental rate when renewing the contract.

Entrepreneurship

Entrepreneurship is an independent activity carried out at your own peril and risk and under personal property liability, aimed at making a profit. The object of entrepreneurship is the implementation of the most effective combination of factors of production in order to maximize income.

Entrepreneurship is carried out on the basis of private and state property (private and government business). Prerequisite Doing business means freedom to choose economic actions.

Researchers of this factor of production unanimously note that a businessman is a new type of business executive with his inherent caution, prudence, striving for the best, and possessing such qualities as independence, enterprise, frugality, and optimism. Business requires a certain type of character and qualifications.

Main characteristics of an entrepreneur:

· independence;

· responsibility;

· initiative;