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Businesses often need to source funds through debt and equity. Since equity cost is more than debt costs, organizations tend to choose debt over equity in their capital structure. Debt comes with a cost though because the companies need to pay interest to the lenders when they acquire debt. The interest they need to pay back is the minimum return they should earn to remain solvent in the long run.What is Debt Capacity?In general, a company should have all the funds required to pay back the minimum required amount of debt or contractual obligations. The amount of debt that can ... Read More
A company’s interest payments are tax deductible. That is, the interest expense paid by a company can be subject to tax deductions. Such a deductibility in tax is known as interest tax shield. For example, there are some cases where mortgages have an interest tax shield for the buyers as the mortgage interest is deductible on the income.Companies normally want to reduce their tax liability as much as possible. Interest tax shields therefore encourage firms to finance their projects with debt, as the dividends paid to the equity investors are not tax deductible.Valuation of the Interest Tax ShieldThe valuation of ... Read More
What is Financial Leverage?Financial leverage is the use of increasing debt to purchase more assets. Leverage is usually employed to increase the return on equity (ROE). However, an excess of financial leverage magnifies the risk of failure, as it becomes increasingly difficult to repay the debt by the borrower.Financial leverage is measured as the ratio of total debt to total assets in its formula. When the proportion of debt to assets increases, the amount of financial leverage does so too.Financial leverage is favorable when debt can be put to generate returns greater than the interest expense related to the debt.Many ... Read More
The EBIT-EPS analysis gives the best ratio of debttoequity which the businesses can use to find an optimum balance in their debt and equity financing. The analysis shows the effect of the balance sheet’s structure on the company’s earnings.Basics of EBIT-EPS ApproachIt is important to understand what EBIT and EPS mean to understand what the analysis is meant to be.EBIT refers to earnings before interest and tax. The metric makes interest and taxes irrelevant. Therefore, an investor can understand how the company is performing out of the balance sheet’s composition which essentially makes interest and taxes the focal point of ... Read More
Certainty equivalent is the amount of cash an investor would accept today than going for a larger amount of cash tomorrow. Investors often use this to deny the risk. The Certainty equivalent helps investors earn a guaranteed income on their investment rather than going for increased risk on their investment portfolios. It is a method of reducing risk while also reducing the income from given investment instruments.Certainty Equivalent is Popular among Risk-Averse InvestorsCertainty equivalent is quite a popular method among risk-averse investors. These investors do not want to invest in high-return but risky investments. Instead, they forgo higher returns for ... Read More
A company’s financial leverage is its dependence on debt. It can impact the company’s return on equity (ROE) positively or negatively due to the increased risk probability.Impacts of Financial LeverageAs an individual or a company will have to pay back the debt, it will always bring about a heightened level of risk. The income an individual or a company earns must be used to pay back the debt, even if the earnings or cash flows go down.From a firm’s perspective, the use of financial leverage (debt) can positively – or sometimes negatively – impact the ROE due to an increased level ... Read More
Embedded OptionAn embedded option is a type of provision in financial security that gives the issuer or the holder of the security a specific right but not an obligation to perform some select actions in the future. The embedded options cannot be separated from the security, as they exist only as a component of the latter. Embedded options can be fixed to any financial security, but they are mostly attached to bonds.The point to note is that, one security may have multiple embedded options. The only restriction in such cases is that the options should not be mutually exclusive. For ... Read More
What is Written Down Value Method of Depreciation?The Written Down Value (WDV) method of depreciation is also known as Reducing Installment or Reducing Balance Method or Diminishing Balance Method. In this method, the depreciation is calculated at a constant fixed percentage each year on the diminishing book value, commonly known as WDV of the asset (book value less depreciation).The use of the balance brought forward from the previous year or book value and the fixed rate of depreciation decreases the depreciation charges over the lifespan of the asset. That is, when the entire lifespan of an asset is considered, the ... Read More
The interp1d() function of scipy.interpolate package is used to interpolate a 1-D function. It takes arrays of values such as x and y to approximate some function y = f(x) and then uses interpolation to find the value of new points.Syntaxscipy.interpolate.interp1d(x, y)where x is a 1-D array of real values and y is an N-D array of real values. The length of y along the interpolation axis must be equal to the length of x.Example 1Let us consider the following example −# Import the required libraries import matplotlib.pyplot as plt import numpy as np from scipy import interpolate # ... Read More
The tanm() function of scipy.linalg package is used to compute the tangent of an input matrix. This routine uses expm to compute the matrix exponentials.Syntaxscipy.linalg.tanm(x)where x is the input array or a square matrix. It returns the matrix tangent of x.Example 1Let us consider the following example −# Import the required libraries from scipy import linalg import numpy as np # Define the input array x = np.array([[69 , 12] , [94 , 28]]) print("Input array: ", x) # Calculate the Tangent a = linalg.tanm(x) # Display the Tangent of matrix print("Tangent of X: ", a)OutputIt will ... Read More