Earnings Manipulation MTR Corporation Limited

Question: Discuss about the Earnings Manipulation for MTR Corporation Limited. Answer: Introduction MTR Corporation Limited is a company which is owned by the Hong Kong government for operating a mass transit railway system. Originally MTR Corporation Limited was established in the year of 1979. The main purpose of written this report is that the researchers want to discuss want to discuss that particular issue which takes place at the time of calculating the cost of capital for the MTR Corporation Limited. Stacey and Jim, the two managers of MTR Corporation Limited get a task for reviewing the expectations of investigators concept and also review the cost of capital (1). The entire report covers the information about the business of the MTR Corporation Limited and the issues arise at the time of calculating the cost of capital. The cost of capital is actually the rate of return on the cost of the company which is earned through investing same amount of money into a different source with the same risk. It is a cost opportunity for making a specific money investment within the compa ny. By the help of the cost of capital, the hurdle rate of money of an organization can be identified. This hurdle rate should be overcome before generating the cost value. The cost of capital basically depends on the mode of financings such as which are used by the organization cost of equity, cost of debt and weighted average cost of capital. Identification of issues Stacey and Jim, the two managers of MTR Corporation Limited try to find out a number of costs which is utilized by the MTR Corporation Limited to borrow the capital. However, according to Jim, the cost of capital is not just the borrowed capital of the company. Again, Stacey guesses that the cost of capital basically represents the average cost of the capital which is used by the company from their entire different source. Hence it can be said that both of the managers do not have a clear idea or knowledge about the cost of capital so they get confused about the fact that what should be included in the cost of capital of a company. For this reason, as per Jim, the cost of capital means that it should be the hurdle rate for the capital that creates problem or obstacles at the time of investing in the projects. However, again an issue arises in the mind if Stacey about the level of the hurdle rate of the project for MTR Corporation Limited. The cost of capital also shows the hurdle rat e of money of an organization. They think that if the cost of capital and the return on cost get equal in the MTR Corporation Limited Company then it means they do not earn any money or profit for the company. Therefore, the developing of the property of the company along with the business of railway become less risky for the MTR Corporation Limited Company rather than building new railway lines. The cost of capital needs to be evaluated in an effective manner as to increase the profitability of the organization. The cost of capital is actually the rate of return on the cost of the company which is earned through investing same amount of money into a different source with the same risk (2). It is a cost opportunity for making a specific money investment within the company. Basically, cost of capital is actually the rate of return of the money which is required to influence the investor for making an investment within the country. The cost of capital is actually the fund cost which i s used for financing a business. The cost of capital basically depends on three types of mode of financing which are used by the organization. Those modes of financing are 1) cost of equity, 2) cost of debt and 3) weighted average cost of capital. The cost of capital also shows the hurdle rate of money of an organization. This hurdle rate should be overcome before generating the cost value. This is mostly used by the company in their process of capital budgeting. By the help of this capital budgeting process, the company can able to determine that whether the organization can able to precede their project or not. The cost of different sources of cost get varies from one company to another company. This is basically taking place depending on the factors like profitability, operating history, credit worthiness etc. However, some of the times the company struggles at the time of breaking of the cost of capital for performing the optimal or most advantageous financing mix according to the cost of capital for a different source of fund. The MTR Corporation Limited Company should become more careful about their cost of equity and cost of debt. If the cost of capital and return on capital get equal then the business do not show any profitability to the company. References Arabzadeh M. A study on effects of cost-of-equity models on cost-of-capital and capital structure. Management Science Letters. 2012;2(6):1855-1864. STROBL G. Earnings Manipulation and the Cost of Capital. Journal of Accounting Research. 2013;:no-no.