capital market

Examples of capital market in the following topics:

• Capital Market

  • A capital market is a financial exchange for the buying and selling of long-term debt and equity-backed securities.
  • A key division within the capital markets is between the primary markets and secondary markets.
  • Money markets and capital markets are closely related, but are different types of financial markets.
  • When a company borrows from the primary capital markets, often the purpose is to invest in additional physical capital goods, which will be used to help increase its income.
  • The NYSE is one of the largest capital markets in the world.

• Types of Financial Markets

  • Financial markets are of many types, including general and specialized; capital and money; and primary and secondary.
  • Examples of financial markets include capital markets, derivative markets, money markets, and currency markets.
  • There are many different ways to divide and classify financial markets: for example, into general markets and specialized markets, capital markets and money markets, and primary and secondary markets.
  • A key division within the capital markets is between the primary markets and secondary markets.
  • While capital markets and money markets constitute the narrower definition of financial markets, other markets are often included in the more general sense of the word.

• Role of Financial Markets in Capital Allocation

  • One of the main functions of financial markets is to allocate capital, matching those who have capital to those who need it.
  • One of the main functions of financial markets is to allocate capital.
  • Capital markets especially facilitate the raising of capital while money markets facilitate the transfer of liquidity, matching those who have capital to those who need it.
  • Money markets allow firms to borrow funds on a short-term basis, while capital markets allow corporations to gain long-term funding to support expansion.
  • The Frankfurt Bond Market is an example of a financial market that allocates capital.

• Impact of the SML on the Cost of Capital

  • The security market line is a graphical representation of the capital asset pricing model that illustrates the idea that investments are priced efficiently based on the expected return and beta-value (risk).
  • Companies often turn to capital markets in order to generate funds -- using the issuance of either debt or equity.
  • This market situation would be quite attractive from the perspective of a company raising capital; however, such an investment wouldn't make sense for a rational buyer.
  • This would not be an attractive market situation for a company looking to raise capital.
  • The location of a financial instrument above, below, or on the security market line will lead to consequences for a company's cost of capital.

• Capital and Technology

  • Firms add capital to the point where the value of marginal product of capital is equal to the rental rate of capital.
  • Firms may buy, rent, or lease infrastructure and tools in the capital market, but even if the firm owns these factors of production, the opportunity cost of using this capital is the foregone rent that the firm could receive if it rented the capital to somebody else rather than using it for production.
  • A firm decides how much of each factor input to use and how much output to produce based on the market prices for outputs and inputs, as well as exogenous technological determinants represented by the production function.
  • The value of marginal product (VMP) of capital is the marginal product of capital multiplied by price.
  • Firms will increase the quantity of capital hired to the point where the value of marginal product of capital is equal to the rental rate of capital.

• Capitalism

  • Capitalism is a system that includes private ownership of the means of production, creation of goods for profit, competitive markets, etc.
  • Capitalism is generally considered by scholars to be an economic system that includes private ownership of the means of production, creation of goods or services for profit or income, the accumulation of capital, competitive markets, voluntary exchange, and wage labor.
  • Economists usually focus on the degree that government does not have control over markets (laissez-faire economics), and on property rights.
  • The differing extents to which different markets are free, as well as the rules defining private property, are a matter of politics and policy, and many states have what are termed mixed economies.
  • Examine the different views on capitalism (economical, political and historical) and the impact of capitalism on democracy

• MVA and EVA

  • MVA = PV (EVAs); MVA is the difference between current market value and investors' capital., and EVA is an estimate of a firm's economic profit.
  • Market Value Added (MVA) is the difference between the current market value of a firm and the capital contributed by investors.
  • where: MVA is market value added, V is the market value of the firm, including the value of the firm's equity and debt, and K is the capital invested in the firm.
  • EVA is net operating profit after taxes (or NOPAT) less a capital charge, the latter being the product of the cost of capital and the economic capital.
  • where r is the return on investment capital (ROIC); c is the weighted average of cost of capital (WACC); K is the economic capital employed; NOPAT is the net operating profit after tax.

• Defining Capital

  • In economics, capital (also referred to as capital goods, real capital, or capital assets) references non-financial assets used in the production of goods and services.
  • Physical Capital: capital that must be produced by human labor before it can become a factor of production (also referred to as manufactured capital).
  • It is a form of capital assets that is traded in financial markets.
  • The value of financial capital is based on the market perception of expected revenues and risk.
  • Social Capital is capital that is captured as goodwill or brand value.

• Optimal Capital Structure Considerations

  • The optimal capital structure is the mix of debt and equity that maximizes a firm's return on capital, thereby maximizing its value.
  • The theorem states that in a perfect market, how a firm is financed is irrelevant to its value.
  • However, as with many theories, it is difficult to use this abstract theory as a basis to evaluate conditions in the real world, where markets are imperfect and capital structure will indeed affect the value of the firm.
  • Actual market considerations when dealing with capital structure include bankruptcy costs, agency costs, taxes, and information asymmetry.
  • Explain the influence of a company's cost of capital on its capital structure and therefore its value

• Cost of capital

  • The cost of capital is the rate companies must pay to finance a project.
  • The cost of capital refers to the cost of the money used to pay for the capital.
  • In order for an investment to be worthwhile, the expected return on capital has to be higher than the cost of capital.
  • This determines the "market" cost of equity.
  • One way of combining the cost of debt and equity to generate a single cost of capital number is through the weighted-average cost of capital (WACC).