1. © Instituto Internacional San Telmo, 2012
NET ASSETS AND THE COST OF FUNDS

2. NET ASSETS
Fixed
Assets
Inventory
(or Stock)
Account
Receivables
Cash
Assets
Equity
Long-Term
Debt
Short-Term
Debt
Account
Payables
Liabilities +
equity
Investments and funds must match
Obviously, investments and funds must match. The
larger the investment you want to make, the more
funds you will need to obtain. But funds are
expensive, aren’t they?
Generally speaking, yes they are.

3. NET ASSETS
But funds are not always expensive. When a
supplier is offering its products or services, it
usually also offers the possibility of deferring
payment of the invoice. And it usually does this for
free.
So, we can say that certain spontaneous and costless sources of financing stem from the fact that
the company buys goods and services, pays taxes,
etc. Those items are normally recorded as
“payables” other liabilities in the balance sheet.
Fixed
Assets
Inventory
(or Stock)
Account
Receivables
Cash
Assets
Equity
Long-Term
Debt
Short-Term
Debt
Account
Payables
Liabilities +
equity

4. NET ASSETS
But funds are not always expensive. When a supplier
is offering its products or services, it usually also
offers the possibility of deferring payment of the
invoice. And it usually does this for free.
So, we can say that certain spontaneous and cost-less
sources of financing stem from the fact that the
company buys goods and services, pays taxes, etc.
Those items are normally recorded as “payables”
other liabilities in the balance sheet.
Net
Assets
So, when searching for funds to finance our assets, we
do not need to worry about spontaneous funds; they
come alone with operations. We just need to fund the
NET ASSETS.
NET ASSETS = TOTAL ASSETS – SPONTANEUS
FUNDS.
Fixed
Assets
Inventory
(or Stock)
Account
Receivables
Cash
Assets
Equity
Long-Term
Debt
Short-Term
Debt
Spontaneo
us Funds
Liabilities +
Equity

5. FINANCING NET ASSETS
Net Assets can solely be financed with:
• Debt: be it long term or short term
(credit). It has an explicit cost: the interest
payable.
• Equity: money contributed by the
shareholders and retained earnings
obtained previously by the company.
Does equity have a cost for the firm?
Obviously, shareholders expect to get a return
on the money they have invested. But
shareholders are the residual claimers of the
future cash flows of the company, i.e. their
investment is riskier than that of debt
providers (usually banks). So they are
expected to earn more money than banks.
From the firm point of view, we can consider
that the return expected by shareholders is a
cost for equity financing.
Fixed
Assets
Net
Assets
Inventory
Equity
Long-Term
Debt
(or Stock)
Account
Receivables
Cash
Assets
Short-Term
Debt
Spontaneo
us funds
Liabilities +
Equity

6. FINANCING NET ASSETS
In conclusion:
• Financing Net Assets has a cost. It is usually
known as the cost of capital. We will
return to this concept later in class during
the next on-site module.
Fixed
Assets
Net
Assets
Inventory
Equity
Long-Term
Debt
(or Stock)
• Hopefully, investment in Net Assets will
yield a return.
The GOLDEN RULE in
finances:
Returns on Net Assets must
be higher than the Cost of
Capital
Account
Receivables
Cash
Assets
Short-Term
Debt
Spontaneo
us funds
Liabilities +
Equity

7. © Instituto Internacional San Telmo, 2012