Risk Differences in Shareholders’ and Creditors’ Claims
Risk Differences in Shareholders’ and Creditors’ Claims
Investors will require different rates of return on various securities since they have risk differences. Higher the risk of a security, the higher the rate of return demanded by investors. Since ordinary share is most risky, investors will require highest rate of return on their investment in ordinary shares. Preference share is more risky than debt; therefore, its required rate of return will be higher than that debt. The risk return relationship for various securities is shown in above figure, It may be observed in the figure that the required rate of any security is composed of two rates a risk free rate and risk premium. A risk free will require compensation for time value and its risk premium will be zero. Government securities, such as the treasury bills and bonds, are examples of the risk free securities. Investors expect higher rates of return on risky securities. The higher then risk of a security, the higher will be its risk premium, and therefore, a higher required rate of return.
Since the firm sells various securities to investors to raise capital for financing investment projects, it is necessary that investment projects to be undertaken by the firm should generate at least sufficient net cash flow to pay investors’ shareholders and debt holders their required rates of return. In fact, investment projects should yield more cash flows than to just satisfy the investors’ expectations in order to make a net contribution to the wealth of ordinary shareholders.
Viewed from all investors point of view, the firms cost of capital is the rate of return required by them for supplying capital for financing the firms investment projects by purchasing various securities. It may be emphasized that the rate of return required by all investors will be an overall rate of return a weighted rate of return. Thus, the firms cost of capital is the “average” of the opportunity costs of various securities, which have claims on the firms assets. This rate reflects both the business risk and financial risk resulting from debt capital. Recall that the cost of capital of an all equity financed firm is simply equal to the ordinary shareholders’ required rate of return, which reflects only the business risk.
Formula for the Opportunity Cost of Capital
The required rates of return are market-determined. They are established in the capital markets by the actions of competing investors. The influence of market is direct in the case of new issue of ordinary and preference shares and debt.
The market price of securities is a function of the return expected by investors. The demand and supply force in such a way that equilibrium rates are established for various securities. Thus opportunity cost of capital is given by the following formula,Where interest in year zero is the capital supplied by investors in period 0 (it represents a net cash inflows to the firm) Ct are returns expected by investors (they represent cash outflows to the firm) and k is the required rate of return or the cost of capital.…
Buying a First Home
Buying a First Home
Most young couples dream of owning their own home and having a nice environment in which to raise a family. Buying a house is often as much about emotion as it is about money. For that reason, some couples make mistakes with their first home purchase.
For a start, it’s easy to get emotionally attached to a house that really is not affordable – it’s a natural human tendency to want something that is slightly out of reach. Emotional attachment can also mean you pay a higher price because you are afraid of missing out. Impatience can lead to another mistake, and that is not taking a long term view of how affordable the house is. How will the mortgage be paid when there is only one income coming in? How will repairs, maintenance and upgrades be paid for? Will interest rate increases be affordable?
The starting point for buying a first home is to establish some criteria for the kind of home that will best suit your needs – for example the size of house, proximity to transport and schools, type of construction etc. Have a look at some properties that meet those criteria to get a feel for how much you will have to pay.
Talk to your bank or mortgage broker about how much deposit you will need, how much you will be able to borrow, and what your fortnightly repayments will be. You will need to be in a strong financial position before you buy, because once you are committed to a large mortgage, it will be difficult to save. Compare the cost of the rent you are paying with the costs of owning a house. These costs include mortgage payments, rates and house repairs (plumbing, electrical, painting etc).
For example, you might be currently paying $300 per week in rent, whereas once you own a house you will be paying $600 per week in mortgage payments, rates and insurance. If your house is truly affordable, you should therefore be able to save $300 per week before you buy. Start saving that money now towards the deposit on your house. The higher your deposit the lower your repayments will be, giving you a bit more leeway to cover interest rate increases or a drop in income.
Your first home doesn’t need to be a big family home that is going to last you for the next twenty years. Being forced to sell because you can’t manage the mortgage may cost you a lot of money, so start with something small and affordable and work your way up from there once your mortgage becomes more manageable.
Some young couples start out by purchasing an investment property. It can be easier to find a house that is affordable if you are not going to live in it yourself, because you can then consider buying in areas other than where you would choose to live. Expenses such as interest, repairs and depreciation will also be tax deductible, making the purchase much more affordable. Through most of your life, your home will probably be your biggest asset and the choice you make with your first purchase will have a significant impact on your future wealth. It’s worth doing your homework to avoid making a costly mistake.…
Rehabbing a REO Property
Rehabbing a REO Property
Bank owned or REO properties represent ideal opportunities for international investors, as they are sold at heavily discounted prices and all outstanding liens are paid by the bank.
The benefits of REO properties are that bank will ensure that all liens are paid when they take title. This will ensure good title without added expenditure for the investor.
The strategy used by REO investors is simple. Firstly, they purchase the property at a substantial discount. Secondly, they fix up the property and then re-sell it at an affordable price to attract first time buyers. First time buyers in Detroit are able to take advantage of the tax credit and other government backed schemes to get first time buyers on to the property ladder.
Unfortunately, some investors get it this simple strategy wrong by overlooking the obvious. Investors that do not perform the correct due diligence or use a reputable investment agency can suffer the harsh consequences. For example, a foreign investor brought a REO property for $7,500, renovated the property by spending another $5,000 and placed it on the market for $20,000 for resale. But, after several weeks of unsuccessful marketing, the property was reduced to $15,000 and it still remained unsold. However, a quick drive through this neighbourhood pointed out that in just one street there were eleven boarded properties, three fire damaged property and numerous abandoned buildings. What this investor failed to appreciate was that when considering Detroit for property investment you capitalise the first three rules of property 1) LOCATION, 2) LOCATION, 3) LOCATION.
Location is the first and foremost factor especially when considering Detroit neighbourhoods and do not get blinded by the low prices for REO properties.
In contrast, there is a successful foreign investor who owns several properties in the various good neighbourhoods around Detroit. However, he used a different investment strategy – buy to hold to cashflow. This particular investor purchased good quality properties for around $25,000. Rather than selling it, he rented the properties at around $900 per month. This allowed the investor to successfully cashflow the properties and potentially resell it until the market spiralled upwards.
The best aspect with property is that if you buy the right property, in the right location at te right price, you are highly likely to make your property investment a glowing success.…
Share Dealing Using High Yielding Dividends
Share Dealing Using High Yielding Dividends
There are many areas of the stock market that are often over looked and in some instances actually avoided by traders for numerous reasons, such as risk, high capital investment, or even the lack of experience or understanding. Nevertheless, there are some that when used properly can create highly successful share dealing strategies. One such area that stands out is the investment in high yielding dividend stocks. Many experienced investors will use this method as a way to build a passive income.
In this area of stock market trading it will be crucial that you take time to develop this strategy, and ensure you have completed adequate research and studied the data fully. It will be crucial that you study historical data, records and graphs for at least twelve months prior of the companies yield. From this data you should only be interested in the companies whose share prices were higher at the end of the twelve month period. The next phase you will begin to dwindle down the high dividend shares.
Generally when searching out high dividend paying stocks it is best to stay within a certain percentage to avoid higher risk factors. Share trading pros typically recommend from 4% to 9%, and this should be added onto the company’s capital appreciation. It has been said that any percentage of 10 or higher may lead to much more risk due to more volatility.
Within share dealing, high yielding dividends can help build your portfolio over some time, however, it is important to note that an investor should only place a small amount of their capital in this area. Like any derivative there is always a risk and high-yield dividends are no exception. It is important to realize that when you analysis the statistics and charts that many of these high yields were actually based upon annualized rates for past disbursements. If you decide that high yield dividend stocks are something you wish to begin with, make sure you use due diligence and know the risks involved.
In closing, there have been many reports and statistics released over the years which have stated that stock market trading using a high yield dividend shares has demonstrated that it is a solid strategy to partake in. It appears that even when the market is on down-slide or in a recessions, investors will still receive their dividend disbursement, although it may be a decreased rate due to the current market economy.…
Ways of Saving For Children
Ways of Saving For Children
Many parents have decided to save for their children. There are many reasons why they may want to help their children once they become adults.
Many want to assist their children through their education. More and more young adults are choosing to go to university, something that can be a major expense. It costs several thousands of pounds a year, so savings to assist with university fees can be a great help. Housing is something that is an increasing problem for young people, with a shortage of affordable housing a common occurrence. Therefore, helping to get their children on the housing ladder is an incentive for many parents to save for their children. If parents have saved for eighteen years, for example, then there could be a significant amount to assist their children to take their first step on the housing ladder. The age of eighteen is the time that many people learn to drive. So another thing that money saved on their behalf can assist with is driving lessons or buying a car.
There are many affective ways of saving for children. The most basic is making payments into a bank or building society account. Many banks and building societies offer special account for the purpose of savings for children. This is the safest option of saving but interest rates tend to be relatively low so this doesn’t have the potential of some of the other savings methods.
Investing in the stock market is an example of a savings method whereby there is more potential for greater growth, but there are also more pitfalls. Stocks can increase very significantly but they can also crash. Over the long term though, most stocks will increase. Over a period of five, ten, fifteen or more years the likelihood of an increase is greater, as there aren’t the same risks as short term investments, which can suffer from short term dips. Stocks are likely to grow more than money paid into a savings account but there is no guarantee.
Using the services of an investment trust is a sensible way to manage investments in the stock market. Here, parents can make payments on behalf of their children and it will be invested by the investment managers. They take a cut, but they are experts in their field so they can usually be trusted to make good decisions. This also means you don’t have to worry about it and can leave it to them. If you lack understanding of the stock market then this is safer than investing in your own choice of stocks and shares.
However you choose to invest on behalf of your children it is a good idea to compare the various investment products on the market, looking at the advantages and disadvantages of each.
Andrew Marshall (c)…
Real Estate Investors and Their Mind Set
Real Estate Investors and Their Mind Set
Many individuals somehow or by direct ways are finding ways to invest their hard earned money and savings in real estate. As there are many reasons for the investment purpose, the foremost reason for the investments made by the investors is that there is a ton of money which can be made from it and so it always attracts the investors.
Once you start your investment objectives in real estate there are few points in which you have to be aware of. The very first thing is that you must have a plan set on the issue what you must do after purchasing the property. There are many options available for this purpose. As many of the investor follow the similar strategy, the very first step is to sell-off the property within days (i.e.) immediately after the purchase of it.
Some investors of real estate restore their property with them and then sell them after many years in order to gain more capital. While some purchase and restore them to let out the property for rental purpose which is going to be continues income stream for the investor. To decide and have a plan for such investment it will be useful for the real estate investors to figure out how to finance it.
Apart from this, there are other important things on which the investors have to be aware of. The next most significant thing is you have to look out the properties which are selling at the lower the price or under the fair value as it will yield you a profit margin. By making use of various available resources you can locate the information on such.
To become a successful investor is not as complicated as most of the people think. It becomes complicated only to those persons who are untrained or don’t have knowledge in such. But once you start gaining knowledge in this field you will find it to be more simple and easy. If you find it difficult in arranging the money or you don’t find sufficient amount of time in the industry which you feel is needed, yet you are eligible to become an investor.
One of the best ways to become successful real estate investors is to learn from the other individuals about their plans, strategies, and ideas. It is a very simple concept to follow their tactics, but always keep in mind your own objectives and plans of investments made. Always remember that the objectives and tactics of one investor will vary from the other investor. Just keep learning the tricks of the other individuals on how to trade and invest in order to generate more profits. And always keep in other resources too which generates the information for the investments in real estate.…
Top 5 Reasons Why Its a Great Time to Invest in South Florida Residential Real Estate
Top 5 Reasons Why Its a Great Time to Invest in South Florida Residential Real Estate
As the title suggests, now is an excellent time to invest in South Florida residential real estate. Here are 5 reasons why (in no particular order of significance):
1) According to the Florida Association of Realtors® statistics, in the last year, prices have dropped well over 20%… this means affordable home prices for both homeowners and investors. In South Florida, specifically the prices have dropped at an even higher rate. For many South Florida real estate investors, this is the first time that they can cashflow $300+ per month on rental properties as part of their long term buy & hold strategy. Many who were investing 5 years ago were actually spending money each month to hold their rentals and were speculating on rapid appreciation that did come to fruition but only for a short amount of time).
2) Speaking of long term buy & hold strategies, its a smart one because the U.S. Census Bureau estimates that Florida is one of three states that will account for nearly half of the total U.S. population growth between 2000-2030. The Bureau also estimated that by 2011, Florida would be the third most populated state in the country! Let’s face it — people are still moving to South Florida and will continue to year after year — both families as well as retirees. These people will need homes to rent and homes to purchase.
3) Foreclosures, particularly in South Florida are in abundance and there doesn’t seem to be a quick end in sight. According to public records, new foreclosure filings in Miami-Dade and Broward counties are on pace to exceed last year’s by substantial numbers. While this is indeed a crisis and an unfortunate series of events, from an investors perspective, there is an opportunity for rehabbers to purchase distressed homes at low prices, fix the homes up, and resell on the market at a competitive price for a quick sale to new homeowner. Foreclosures in
4) Interest rates are low, which translates into more buying power for homebuyers. Low interest rates in combination with government programs such as The American Recovery and Reinvestment Act that provides tax credits, help to increase the eligible homebuyer pool.
5) With the economy troubles, the perspective of most may be that there is a limit of available funds for real estate investing. While its true that available capital and funding has decreased from traditional institutions, the fact remains there is a substantial funding available via private investors – many of whom are retirement-age or near retirement and are seeking opportunities to avoid running out of money and diversify assets after getting a huge black-eye in the stock market. Rehabbers and landlords have an opportunity to find those private investors and begin to build wealth for themselves and provide a safer return on investment for the private lender.
I believe that these 5 reasons alone provide a compelling case for why those who have been considering South Florida real estate investing should get off of the sidelines. An investor with integrity and good intentions should see this current market as an opportunity to build wealth and also help many struggling homeowners who have faced foreclosure and are in need of affordable housing options while rebuilding credit.…
Information on Investment Property Loans
Information on Investment Property Loans
People make investments in the hope of appreciation of the value of assets in getting a good return in the future. There are countless ways at which investments can be done and the most stable of these investments can be investing in properties or real estate investment. Big investors who have good money at their disposal always go for property investments. Property market may see some fluctuations in the short-term but a few years down the line almost all kinds of properties appreciated the value so this is considered to be very safe investments as compared to any other kind.
Buying property needs a lot of money and not everyone can afford to buy one or have their own property. However it always makes good sense to arrange for finances if there is a good deal and an investor knows that it will appreciate to the years. There are investment property loans available for such situations, when an investor can get a loan to buy property. This kind of alone can be taken for any kind of property, it could be a commercial industrial or residential one.
There are many sources from where such investment body loans can be borrowed the most common being banks, financial institutions and credit unions. Sometimes, it also helps the investors in making such kind of a good investment in big projects thereby taking a partnership or an interest in the project. As with every other kind of alone, there are many factors which work on deciding the terms and conditions of such loans. Some of these factors can be the credit history, the assets and the income of the borrower.
A lot of investors use such investment body loans to pick up good deal in the market which may be out of their budget but have a good profit-making potential. As the investors pay their loans on time, they build up good reputation and relations with the lenders so that they can cheaper loans on easy terms and conditions. This can be a good financial resource which can be used by investors to make capital gains.…
What Property Investors Should Know
What Property Investors Should Know
If you are not cautious enough with your investment decisions, it can be hard to succeed and become one of the successful property investors. It doesn’t really matter if you are a newbie or a professional because if you don’t work hard, you will not see the best results. Why don’t you subscribe to property magazines and visit real estate sites? These are essential tools that can help you in finding the best investment opportunities.
If you are not familiar with the basics of investment, you can count on the professionals to help you out. With their knowledge and expertise, you will learn the concepts of capital growth, rental growth, and other important info. Why don’t start investing on buy to lets? If you think that you can become a good landlord, this is a great option for you and you should be prepared to handle maintenance, repairs, etc. for 10 to 30 years! Tenants will occupy the property. You will not have any trouble with the mortgage payments every month since the rental income will already cover it; at the same time, the property will also increase in value or appreciate. In 10 -30 years, you can make a profit by selling the property but you can always hold on to it if you want to.
In the real estate, it’s not just about buy to lets. You see, there are still other properties that you can invest like commercial properties. The properties are going to be used to put up restaurants, shopping malls, offices, service stations, and many other establishments. You will be dealing with clients who want to own a successful business.
Flipping properties is also one of the favorites of property investors. Finding the right property at a relatively low price can be hard but if you do your homework, you’re sure to find them. After finding an ideal property, you can now sell it to make profit. Don’t be like the illegal flippers out there. You can make profits by flipping properties that right way.
The real estate industry will allow investors like to earn money for the short term as well as for the long term. Do you want to become a landlord? Or would you rather flip properties?
Make sure that possess sufficient knowledge about property investing. Many property investors were able to succeed and you can also do it. Earn enormous profits with the right investment opportunities.…
Avoiding Trading Mistakes – These Common Mistakes Will Cost You
Avoiding Trading Mistakes – These Common Mistakes Will Cost You
Forex, or Foreign Currency Trading can be an extremely profitable venture. Or it can be a complete bust. An astounding 95% of amateur traders fail in the Forex markets, many bankrupting their accounts.
So does that mean that you shouldn’t even consider Forex trading for yourself?
Like any venture, you need to evaluate the upside, as well as the pitfalls to avoid.
Here are 7 common mistakes to avoid when you are learning how to trade in the Forex markets.
Money Management:
This is THE #1 MISTAKE of amateur traders, and it can’t be emphasized enough. A good rule is never to put up more than 1-2% of your account on any one trade. That way, you’re not risking your trading capital, and you’ll have to lose 100 trades in a row to wipe out your account. Keep the Risk to Reward Ratio at 1.5 to 1.
Trading is a Business, Not a Hobby:
Too many traders don’t take trading seriously. They ‘dabble’ in the markets, or take the approach of ‘trying it out’. Treat it like a business, and it will reward you like one.
Invest in Your Education:
Trading is a skill set that you can certainly learn, but take the time and money investment into learning the right way. Too many bad habits can be picked up by learning ‘on the fly’ from cheap courses. Most professional traders have gotten there by learning from a mentor. Specifically, someone holding their hand through all sorts of market conditions. In the end, its an investment in yourself.
Beware of the Latest and Greatest Strategies:
While there are excellent strategies out there, it won’t do you any good unless you have the trading experience to apply it. Start with learning the basics.
Is Trading for You?:
Trading takes discipline. The discipline to learn and the discipline to stick to rules consistently. If you’re not a disciplined person, or you like to bend the rules, recognize early that trading may not be for you.
Keep Your Expectations Realistic:
While there is tremendous money to be made in the Forex, and you can accelerate your retirement, it won’t happen overnight. At least, not when you’re learning how to master trading skills. Think about building wealth slowly, let your account build and accrue. Most of all have patience, and don’t set yourself up for failure by unrealistic expectations.
Don’t Spread the Word About Trading:
At least not yet. To overcome and master the psychology of trading, you need a positive mindset. Unfortunately, well meaning friends and family who don’t know anything about trading will very willingly offer their advice. These thoughts can stay with you, and set you up to sabotage your trading. Best to keep trading to yourself for awhile, until your confidence is solid.…