Mini Project 4

Mini Project 4


Financial decisions require critical and analytical assessment of the costs, risks and the expected returns. In most cases people or investors face problems in making the right decisions and this sometimes leads to them not achieving their objectives. It is therefore important to lend the service of an expert to be directed on the best financial decisions before investing in certain projects.  The paper responds to various questions relating to financial decisions, investment and decision concerning debts.

Purpose of the paper

The paper delineates or seeks to provide answers to various questions concerning financial decisions. Therefore, the paper aims to provide insightful information on how decisions pertaining to investment, financial and debts need to be arrived at. The major aim of any investor or businessperson is to minimize risk at all levels despite having some challenges. The driving force is to employ the right decisions at all time.

Overview of the paper

The paper has three major sections. Introduction, which provides a clear picture of what the paper, is all about. This is captured in the thesis statement.  The body covers the bulk of the paper’s discussion. Various questions are addressed including decisions on the costs of capital a business need to choose to improve cash position,  investment  advice,  and understanding the risk and the costs of  leveraged equity. The last section is the conclusion that summarizes main points and provides recommendations and lessons learned.

Decisions that the firm is required to make about cost of capital with the improved cash position

When the cash position of company improves, some of them make decision of investment in more projects. It is not however appropriate to make quick decisions of investing in a new series of projects based on the improved cash position. One of the important considerations that are required to be considered before making this decision of investing in new project is the cost of capital. Cost of capital is the total amount that a company has both in terms of equity and in terms of debts.  Cost of capital is also the minimum return that investors anticipate or expect for their capital that they have pumped into the company (Modigliani, & Miller, 1958). Therefore, it is used as a benchmark in determining what the new project needs to meet. Therefore, the kind of decisions that company is required to make is whether the company expected return on capital is more than the cost of capital to improve the future investor confidence.

Addressing hard behaviors and putting the friend on the right track of investments

Business people and investors or small business people may be given advice, which may not be realistic. In the case of my friend, I managed to change the hard behaviors of my client by explaining to him how his decision was going to impact on his investment.  I therefore used net present value to help the client in his investment decisions.  Through Net present value, I was able to help the client in determining the key drivers that determine whether the project was going to succeed or not (Financial crisis, 2009). It also demonstrates the interplay between factors that affect the cash flow.  Any investment decision needs to factor in the risks and the expected revenue. Comparing these two for certain duration of time will determine whether the decision to be taken is appropriate or not. This explanation helped in changing the mind of the client making him choose the right investment plan.

Debts can be used to boost investment. A business decision to take a debt is guided by various principles or needs. Some people take debts to improve their investments while others take debts to avoid running bankruptcy. It is also important to note that taking a debt is a risk because it is not known whether the debt will be paid in good time or not. Before taking a debt, it is important to know the risks and other issues that might affect that position.  Leveraged equity is the stock in public traded company that has a significant amount of debt and therefore it carries same risk as debt. Therefore, to be free from bankruptcy the company must service this debt. When the cost of capital of debt is low, leveraged equity has the potential to increase returns for shareholders. Unleveraged cost of equity is discount rate that is provided to an investment that is financed by equity. The client can be helped to understand the difference in the risk and cost of capital for leveraged equity with risk and return of unleveraged equity by explaining the meaning of the two words and there relation to debt and business finance.  An individual cannot understand the risk and return of the terms without understanding what they mean.


In business, investment decisions should be done well to ensure that the business continues to function appropriately. Many business owners initiate projects without really understanding the risks and their returns. Understanding certain concepts such as cost of capital, net present value and leveraged equity among others as explained in the paper are important to be considered in reaching investment decisions.

Lessons learned and recommendation

Through the discussion, I have learned the need to engage in thorough analysis and evaluation when choosing the right project to invest in. It is not always advisable to look at the cash position of the company when making decisions of new projects. The risks and returns should be put into consideration.

I therefore recommend that all investors and business people to be critical in making decision of investing in new projects. They need to use net present value to make decisive decisions in making decisions to invest in new projects.



“Financial crisis” “The American Recovery and Reinvestment Act of 2009,”

Modigliani, F., & Miller, M. (1958). “The Cost of Capital, Corporation Finance and the Theory     of Investment”. American Economic Review (American Economic Association), 48 (3):       261–297.


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