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Economics & Finance
Finance Management Articles
Page 34 of 96
What is an Embedded Option? Types of Embedded Options
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 MoreWritten Down Value (WDV) Method of Depreciation
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 MoreCurrent, non-current and contingent liabilities
Classification of LiabilitiesDifferent types of liabilities can fall under the following three categories −Current liabilities are the liabilities that are due and payable within one year. These are also known as "short-term liabilities".Non-current liabilities are the liabilities that have to be cleared after a year or more, hence these are also known as "long-term liabilities".Contingent liabilities are a separate category of liabilities that may or may not arise, depending on a certain event.Current LiabilitiesCurrent liabilities are debts or obligations that need to be paid within a year. Current liabilities should be closely watched by management to ensure that the company ...
Read MoreHow should Inflation be treated in Investment Evaluation?
Inflation is an important parameter in investments, as it erodes the value of money. It must be included in capital budgeting so that cash flows are appropriately included in the evaluation of an investment. In doing so, the inflation targets must be forecasted accurately over a considerably longer duration.Here are some considerations that must be made while creating inflation in an investment evaluation process.The forecasts must be spread over a periodInflation is an ever-existing truth nowadays. Investors face this reality day-in and day-out. They want to gain a return that is more than the inflation rates so that the value ...
Read MoreWhat is Free Cash Flow?
Free cash flow is the capital retained by a company after it has paid all its expenses, including building, rent, tax, payroll, inventory, etc. Companies may use the free cash flow for anything it sees fit.Free cash flow is a true measure of a company’s profitability.Businesses usually calculate free cash flow to take critical business decisions, such as whether to invest the money for expansion or to invest the money in ways to reduce the costs of operations.Investors use the free cash flow metric to check the frauds in accounting, as these measures are stringent and less manipulable than net ...
Read MoreWhat is Product Cannibalization?
Product cannibalization is the process in which a new project or product eats away the cash flows earned by an already existing product. That means, when a new project or product is launched, it may take the cash flow away from an already running product or project. Business decisions must include the cannibalization effect into consideration because ignoring this may lead to huge losses sometimes.Capital budgeting decisions are taken keeping profitability and market share of products and they should include a holistic approach.A new product or project must not negatively impact an already available product or project which is running ...
Read MoreWhat is meant by Financial Distress?
Financial distress is a situation in which a company cannot meet its obligations. In fact, companies borrow debts from investors for operations and growth. When the company performs badly, it may be unable to repay back the loans and funds it has borrowed from the lenders. This is called financial distress of the company.There are many costs attached to financial distress. These may include costs related to employees, managers, customers, suppliers, and shareholders.Costs Related to EmployeesThe employees of a distressed company are not confident. They are demoralized and worried about their future. This affects the quality of the products. The ...
Read MoreRisk-Adjusted Discount Rate Vs. Certainty-Equivalent Methods
To better understand the two concepts of risk-adjusted and certainty equivalent methods, let’s understand what they mean and how they are useful for investors.What is Risk-Adjusted Discount RateThe risk-adjusted method combines an expected risk premium with a risk-free rate to calculate the present value of an investment.Risky investments include investments in real estate and other high-level risk projects. Although the market rate is considered as the discount rate, in some cases, a risk-adjusted rate for the investments becomes crucial for the investors.The risk-adjusted discount rate method correlates risks and returns while signifying the requisite returns of an investment. This means ...
Read MoreWhat is Sensitivity Analysis?
Sensitivity AnalysisSensitivity analysis is a financial tool to analyze the effect of a set of independent variables on a specific dependent variable under some given conditions. It is used in a wide range of applications, such as in biology and finance as well as economics.The sensitivity analysis studies numerous sources of uncertainty that contribute to the forecast’s uncertainty by using what-if queries altogether. It is used within limited boundaries that rely on one or more inputs.How Does It Work?Also known as What-if analysis or simulation analysis, sensitivity analysis helps to ascertain some decisions depending on numerous independent variables.For example, it ...
Read MoreInflation – Definition, Causes, Effects, Calculation
Inflation is the rise of prices of daily usable goods such as food, clothing, fuel, transport, etc. Inflation increases the cost of living. It can also be considered as the change in the average price of services and commodities at regular intervals. It indicates the losing value of purchasing power of a unit of a nation’s currency as the services and products get more expensive.In general, inflation is the difference between the demand and supply of a good or service. When aggregate demand exceeds aggregate supply an increase in price level takes place.Although high levels of inflation are unwanted, a ...
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