Question

An important point is that we are estimating the cost of long-term capital that the firm raises through investors. The firm also has a source of capital implicit in its operations, and that is spontaneous credit. This credit comes about in the normal operations of business as the firm orders materials, and incurs wages payable and taxes payable. We want to exclude from our capital analysis all spontaneous sources of operating capital and only include investor capital, including retained earnings. Looking at the right side of our balance sheet, we will exclude the current liabilities of accounts payable, wages payable, taxes payable, and accruals. We will include both the current portion of long-term debt that is reflected in current liabilities and notes payable. We will include all investor long-term liabilities, and all equity, external and internal. This provides our value of investor-supplied capital. As you discuss your points, I invite you provide examples to illustrate your points.