Understanding the Cost of Funding and Investment Strategies

COST DUNA Funding
COST OF OWN FINANCIAL RESOURCES
The calculation is difficult. If the company does not distribute dividends in a year, it might seem that the cost is zero. The dividend policy depends on the results, the situation of the company, and company policy...
Cost of Outside Resources in Medium and Long Term
There is a contract that specifies the conditions of the loan with the interest payable. To calculate the cost (APR), all expenses were taken into account.
COST OF SHORT-TERM OUTSIDE RESOURCES
It is necessary to differentiate between financial sources that require negotiation and those that are spontaneous. Spontaneous sources are resources that have zero cost (salaries, social security...).
Weighted Average Cost of Funds
It can be a weighted average cost, taking as weights the percentage that each source represents of the total resources. As the average cost is smaller, the greater the number of profitable investments.

SELECTION OF THE SOURCE OF FUNDING
Depends on:

• Type of Investment: If a fund has been running well, the funding source can be short-term, while if it must remain firm for more than one year, it must be long-term. For investments that involve renovation of goods, funds for amortization are necessary.
• Degree of Indebtedness: If the company wants to reduce the degree of indebtedness, it must use its own funding sources. If the company wants to increase profitability, it will use external sources.
• Cost of Funding: Short-term sources have a higher cost than long-term. Funding providers and some sources have spontaneous zero cost.

INVESTMENT
To carry out their activities, firms need factors of production. For the manufacture of new products, it is necessary to purchase machinery, buildings, etc. The company manages the resources of capital markets (capital provided by firms, households, and the state).

FEATURES OF DUNA INVESTMENTS

• Initial Disbursement (D₀): Amount the company pays to acquire assets.
• Duration of Temporary Investment (n): Years during which there are inflows and outflows of money.
• Net Cash Flows (F_i): Payments (C) - Payments (P).
• Residual Value (R): Value of the asset at the end of the investment's life.

METHODS OF SELECTION AND EVALUATION OF INVESTMENT

• Static Method: It assumes that the value of money is constant over time.
• Dynamic Method: Takes into account the different values based on when the cash flow occurs.

Static Methods
- Payback Period (T): If the flows are equal (F₁ = F₂ = F_n = F), the formula is T = C / F. If not, it does the following: Missing X € at the beginning of F_n, F_n / Y = € 12 per month; X / Y = Z months.

Dynamic Methods
- NPV (Net Present Value): This consists of updating all net cash flows to the present and obtaining the capital value at this time.
C + F_-1 / (1 + i) + F₂ / (1 + i)² + ... + F_n / (1 + i)ⁿ If the result of the NPV is negative, the investment must not be conducted; if positive, it can be done.
- IRR (Internal Rate of Return) (r): - Do · (1 + r)² + F₁ · (1 + r) + F₂ = 0, (1 + r) = X² + F₀X + F₂ = 0; Second-degree equation; (1 + r) = Z, r = 1 - Z. If r > 0, the investment should be made. If r = 0, it neither wins nor loses the investment. If r < 0, it is not advisable to make the investment.
Middle Period of Maturation for DUNA TRADE COMPANY
Subperiod of inventory storage (PM): is the time goods are in stock until sold.
Subperiod of payment (PM_C): Time it takes the company to collect bills and letters.
Payable subperiod (PM_P): Time the company takes to pay suppliers.

PM = PM_A + PM_C - PM_P

RELATIONSHIP BETWEEN THE PERIOD OF MATURATION AND WORKING CAPITAL
The working capital is the set of resources needed to finance the company during the financial period of maturation. Therefore, the shorter the period of maturation, the lower the working capital needed.
Should a company experience medium-term financial hardship, it could present a negative working capital, without implying a problem of liquidity for the company.