Capital Budgeting

2477 Words Apr 14th, 2013 10 Pages
CAPITAL BUDGETING PROCESS
HSM 340
3/30/12

Organizations that decide to issue bonds generally have six steps to go through. Let’s discuss them. The first step is for the issuer to select bond counsel and the underwriter or financial advisor. The issuer and the solicitor work with these participants to structure the financing. Some basic questions need to be answered: (1) what is the purpose of the issue -- to fund a capital project, to refund prior debt, or a combination of both (2) what are the legal parameters involved -- does the capital project serve a proper legal purpose, can the debt be refunded under the federal tax rules (3) how should the bonds be sold -- through negotiation with one underwriter or through a bidding
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At the closing, the participants execute the various closing documents. The underwriter wires the purchase price for the bonds to the paying agent. The paying agent, at the direction of the issuer, pays the costs of issuance and applies the balance to fund a construction fund or to refund the prior debt. After the closing, bond counsel distributes a complete set of the closing documents to each participant.
When an organization wants to purchase assets they sometimes choose to lease assets rather than buy them out right. This type of financing offers many advantages to an organization. The two kinds of leases that an organization can choose from is an operating lease or a capital lease. Both of these leases will in effect provide financing in order to acquire an asset, but the effects of each are accounted for differently and are reflected differently in organization’s financial statements.
An operating lease is the straightest forward of the two. The lessee (the organization) makes an agreement with the lessor (seller of the asset) for the use of an asset. Basically the organization is renting the asset with an installment payment (which usually includes interest) with intentions to return the asset when the lease ends. An example of an asset that would be commonly financed with an operating lease is new technology. Because technology is going to change, it is often better to lease the asset rather than commit…

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