By investing long-term, the company is produces value today. But, how much value?
Answer
The answer depends on the investments’ expected future cash flows and on the cost of the funds.
Borrowing is not costless. Neither is using owners’ funds.
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Parent (intermediate) annotation
Open it The company acquires the capital or funds necessary to make such investments by borrowing or using funds from owners. By applying this capital to investments with long-term benefits, the company is producing value today. But, how much value? The answer depends not only on the investments’ expected future cash flows but also on the cost of the funds. Borrowing is not costless. Neither is using owners’ funds.</b
Original toplevel document
1. INTRODUCTION
A company grows by making investments that are expected to increase revenues and profits. The company acquires the capital or funds necessary to make such investments by borrowing or using funds from owners. By applying this capital to investments with long-term benefits, the company is producing value today. But, how much value? The answer depends not only on the investments’ expected future cash flows but also on the cost of the funds. Borrowing is not costless. Neither is using owners’ funds.
The cost of this capital is an important ingredient in both investment decision making by the company’s management and the valuation of the company by investors. If a compa
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