Long-Term FinancingAn established company is considering expanding its operations and will need additional long-term capital financing to achieve its business objectives. Long-term financing involves debt or equity instruments with maturities greater than one year, and the cost of this long-term capital can be calculated using the Capital Asset Pricing Model (CAPM) or the Discounted Cash Flows (DCF) model. This report will consider the costs and characteristics of various long-term debt and equity financial instruments and discuss prudent debt-to-financial capital ratios. Various dividend and principal repayment policies for corporate bonds will also be considered. Economist William Sharpe won the Nobel Prize in 1990 for his research on what became the CAPM theory of estimating the cost of capital for companies and evaluating the performance of managed portfolios. Sharpe "provided much of the basis for what is now called the Capital Asset Pricing Model (CAPM)" (Frängsmyr, 1991) through a financial model that explains how securities are priced based on their potential risks and returns. “The CAPM is a linear relationship between individual stock returns and stock market returns over time” (Block & Hirt, 2005, p. 342). Although there is more than one formula for the CAPM, the most common is called the market risk premium model presented below (Block & Hirt, p. 343):Kj = Rf + β(Km – Rf)Where: Kj = return on the company's common stock Rf = risk-free rate of return (short-term Treasury securities), β = beta coefficient or historical volatility of common stock relative to the market index, and Km = average market return based on an index appropriate market. Market Risk The premium formula assumes that the rate of return or premium required by investors is directly proportional to the perceived risk associated with common stocks. The beta coefficient is a measure of stock volatility for the individual company, compared to an equivalent market indicator of similar stocks. Higher betas mean greater risk. When the risk associated with a particular security is equal to the risk of the market index or the average risk across multiple securities, the beta coefficient (β) will be equal to 1.0 and Km = Kj. The most volatile stocks will have a beta coefficient greater than 1.0, while the least volatile stocks will have a beta below 1.0. If the risk-free rate of return (Rf) and the average market return (Km) are considered fixed, it is possible to calculate the required rate of return on the company's shares for the securities market line (SML) or the rate of required return.