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The major differences between Earnings per share (EPS) and dilute Earnings per share (D-EPS) are as follows −Earnings per share (EPS)Dilute Earnings per share (D-EPS)Basic earnings per equity share of a company is calculated.Calculates earnings per convertible share of a company.Main purpose is to calculate profitability of a company.Main purpose is to calculate profitability of a company which includes convertible securities.Less significance.More significance.Common shares are included in calculations.Common shares, preferred shares, debt etc. are included in calculations.More value of measure.Less value of measure.Easy to calculate.More complicated to calculate than EPS.Read More
Rs.Sales (S)1000000Variable cost (VC)375000Fixed cost (FC)95000Debt425000Interest on debt10%Equity capital590000SolutionThe solution is given below −return on investment = EBIT/ (D + E) return on investment = (S – VC – FC)/ (D + E) return on investment = (1000000 – 375000 – 95000)/ (425000 + 590000) return on investment = 530000/ 1015000 return on investment = 52.22%operating leverage (OL) = (S – VC)/ EBIT operating leverage = (1000000 – 375000)/ 530000 operating leverage = 625000/ 530000 operating leverage = 1.18financial leverage (FL) =EBIT/ EBT financial leverage = 530000/ (EBIT – I) financial leverage = 530000/ (530000 – (425000*10%)) financial leverage = 530000/ (530000- 42500) financial leverage = 530000/ 487500 financial leverage = 1.087combined leverage = OL * FL combined leverage = 1.18 * 1.087 combined leverage = 1.28Here,EBIT = Earnings before interest and tax.EBT = earnings before tax and after interest.I = interest on debentures.
Cost of capital is an alternative investment that an investor can invest to get equal rate of return. In other words, it is the opportunity cost that an investor can invest the same money in another investment which is having similar risk and other characteristics. It plays an important role in capital budgeting decisions. It provides guidelines to determine optimal capital structure for a company.Significance of cost of capital is mentioned belowHelpful in making capital budgeting decisions by using discount rates to calculate future cash flow using present values.Helpful in making capital structure decisions by raising its source of funds ... Read More
Importance of financial ratios is as follows −By analysing and inspecting the previous results, ratio analysis can relate between different items.Ratio analysis can be used to prepare budget, can formulate policies and also used to plan future.Ratio analysis tells whether the firm is improving or not.Ratio analysis act as surveyor of efficiency.Inter firm comparison can be made.Tells about short term liquidity position.Long term solvency can be measured.With the help of ratio analysis, investors can analyse company’s financial statements to their interest.Determines profitability of a company.Operational efficiency can be analysed.Helps in understanding the business and financial risks of a company.Advantages of ... Read More
The major differences between temporary working capital and permanent working capital are as follows −Temporary working capitalIt’s the additional working capital to permanent working capital.Variable working capital.Dependent on variable factors.Sometimes increase/decreases (fluctuates from time to time) in nature.Financed through short term funds.Categorised into seasonal working capital and special working capital.Permanent working capitalIt’s the minimum capital to maintain in order to meet operational levels.Fixed working capital.Independent of variable factors.Stable in nature.Financed through long term funds.Categorised into Regular working capital and reserve working capital.
The major differences between net working capital and gross working capital are as follows −Net working capitalQualitative in nature.Tells about whether company can meet its operating expenses and its current liability.Net working capital is result of difference between current and current liability.Concept used in accounting system.Suitable for partnership firms and sole traders.Reveals company’s financial position.Companies net working capital increases when, there is increase in retained profits and sale of assets.Gross working capitalQuantitative in nature.Tells about overall amount at hand for financing current assets.Gross working capital is the result of sum of all current assets.Concept used in financial management.Suitable for companies.Financial ... Read More
The major differences between profitability and liquidity are as follows −ProfitabilityProfit made by the company in a period/during a year.May not have enough liquidity.A company which is profitable can go for bankrupt if it does not have liquidity in short term.Present in income statement.Determines Gross profit margin, net profit margin, EBIDTA margin, EBIT margin, CAGR.Measures financial performances.Tells about how good is company is able to generate margins form its business.Long term.LiquidityHow much of cash is available by a company at point of time.May not be profitability.A company which has liquidity but nor profitable can’t go for bankrupt.Present in balance sheet.Determines ... Read More
The major differences between turnover and profit are as follows −TurnoverTotal amount of cash received from sales by a company in certain period.Also called as revenue, sales, topline.Turnover is the multiplication of unit selling price to number of units sold.It is the superior one and is independent of profits.Turnover/revenues from operations, Non-operating turnover/revenues are types of turnover.Present at top in income statement.Determines demands in market for products/services of a company.ProfitCash available after accommodating costs like administration costs, depreciation, taxes etc.Also called as net income, net profits, profit after tax, bottom line.Profit is difference between turnover and costs.Product of turnover.Depends on ... Read More
The major differences between corporation and incorporation are as follows −CorporationIncorporationIt’s an entity to run a business.First process in registration as corporation.It is termed as CORP.It is termed as INC.Second stage of business.Takes place incorporation register process.Holds liabilities on personal assets.Limited liability.Outcome of incorporation process.Should follow legal process.Don’t get funds for company.Act as pool to get funds.Relates to day to day activities of business.Safeguards the interests and personal assets of owners/shareholders.Will have almost same functioning, features and goals.Process differ from country to country.Formed to carry out specific operations.Helps entity to become a corporation by series of steps.Read More
The major differences between dividend and growth are as follows −DividendShorter time horizon (cash inflow is regular).Cash flow (stocks) at periodic intervals.Release of excess return.Tax free (money received).Less risk (money will get at regular intervals).Outperform growth stocks.Less volatile.Capital appreciation and cash flows (upside).Usually perform even in bear market.Investors will look for low market value than intrinsic value.Investors will look at dividend yields, pay-out ratio.GrowthLonger time horizon (cash inflow is end of period).Cash flow at redemption/sale only.Re-investment of excess return.Tax free (money received), only for some schemes of mutual funds.Higher returns for investors.Underperform than dividends stocks.More volatile.Only capital appreciation (upside).Poorly perform ... Read More