PERCEPCIONES DE LOS NNA ACERCA DEL TRABAJO INFANTIL

11. COST OF CAPITAL.

The fact that capitalf one of the factors of producinq

shipping services« has a cost that has been accepted by economists throughout the countries. It is a subject of great importance in financial management. The cost is a result of the supply of capital available relative to its demand. Economic rationality requires that the planned use of capital produce a rate of return sufficiently high enough to at least pay the current market cost of the

capital. In the process of optimizing the earnings of a

shipping company, it is to be anticipated that the capi­ tal of the entreprise will be acquired at the most econo­ mical rate , that no more will be paid than is necessary to obtain the money. This principle applies not only to existing capital but also to any expansion that a company contemplates.

The cost of capital is essentially composed of two types: Cl) Opportunity cost and C2) risk cost. The opportunity cost is based on the concept that the present value of money is greater than its future value. Giving up the opportunity to use capital to fulfill one's immediate needs involves sacrifice and, therefore, the supplier of capital deserves compensation for this sacrifice. The risk cost is under the assumption that whenever the owner of capital invests it in any kind of venture, there is always some risk of loosing part or all of the capital. It is only logical, that the provider of capital be com­ pensated for carrying the burden of risk.

The cost of capital for a company is simply the rate that it has to pay to influence the investor to let the compa­ ny use this money rather than another. The investor, in general, has a wide range of choices from wich he may select to invest his money.

Whenever an expansion of a fleet is contemplated, the management of a shipping firm must ascertain the cost of capital in order to determine whether the proposed expansion is warranted. Some sort of comparisons, quanti­ tative and qualitative, must be made between the additio­ nal earning anticipated and the added costs entailed. The

lower these costs the more likely that an expansion will be undertaken.

The cost of capital includes the contractual payments that must be made for debt and preferred stock. To this must be added the return expected by the common stock­ holders. The costs associated with different types of financing are interrelated; that is, the cost of each type depends on the proportions of others in capital structure. But there are certain characteristics unique to each method of obtaining money and a separate treat­ ment of the individual souces of financing is needed before their interrelationship can be analyzed.

The cost of capital and the means used to measure it are significant to the shipping industry. If the measures of the cost of capital are defective, so that cut-off rates generally too high, the industry may not grow as rapidly as it might. Total investment in new ships and other marine facilities will be lower than economically justi­

fied. If some companies employ cut-off rates that are too low, they will divert resources from more productive to less productive uses.

One of main reasons why companies have such ineffective capital expenditure programs is the failure on the part of management to know what the company's cost of capital actually is. The principal types of out-of-pocket costs associated with the acquisition of capital through the financial contracts of the fixed return types of securi­ ties can be classified as follows:

Cl) Periodic payments to the holders of bonds and prefer­ red stock in the form of interest or dividends.

C2) Any payment, which is referred to as the spread or commission, to the underwriters of the issue as com­ pensation for their services in marketing the securi­ ty and for assuming the risks associated with a pub-

lie offering.

<3:i Other costs such as legal and printing costs inci­ dental to the making of the contract which are paid by the issuing company.

(A) Any payment to bondholders at the retirement of an issue in excess of the amount origianlly provided by the investors(*13).

III. CAPITAL EXPENDITURE DECISIONS.

The success or failure of the company is dependent partly upon the right decision in committing capital for the acquisition of ships and other marine property and equip­ ment. These investment decisions deserve a special atten­ tion of top mangement since management is constantly faced with limited amount of resources to apply to a wide arrangement of investment proposals. Therefore, to satis­ fy some basic management functions - planning and control of capital expenditures - projects must be selected which will optimize profits and at the same time fit the company's overall objectives.