Found 1748 Articles for Growth & Empowerment

What is Strategy?Strategy is specifically an action the managers of a company take to attain a specific goal. It can also be defined as a general direction set for the company and its various departments to attain a desired state in the future. To apply a strategy, a company must follow a strategic planning process.Strategy, in general, means integrating the organizational processes and using and allocating the scarce resources in the organizational environment so that the present objectives are met in a wholesome manner.While planning a strategy, it is required to consider the fact that decisions are not made without ... Read More

Risk preference is the attitude of taking financial risks by an investor. An individual investor, while making an investment decision, would take risks according to his or her risk preferences. Depending upon the risk preference, the investor will classify the risks associated with an investment and thereby find the investments that match his/her preferences.There are two major factors that affect the decisions of decision-makers. These are the expected values and the measures of standard deviation. It is however impossible to realize whether investors will go for high expected values and high standard deviations or they will stick to low expected ... Read More

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

Sequential analysis deals with the sequence of events an investment process follows instead of just accept or reject a process. Sequential analysis is more relevant in practice because it shows all the probable events in terms of a decisions tree that constitutes the probability of an outcome generated in the process.Decisions trees are not a perfect measure of a future event, but they represent quite a close approach to the original outcome in general. However, some steps must be followed while constructing a decision tree which are explained below.Defining the InvestmentsThe investment for which the sequential investment has to be ... 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

As financial planning and policymaking are of top priority for firms, they must use proper scrutiny and analysis of the following elements of capital structure −Capital MixMaturity and PriorityTerms and ConditionsCurrencyFinancial InnovationsLet's check the importance of each of these important elements of capital structure in detail.Capital MixFirms often need to take a decision on how much debt and equity must be sourced for the operation of the business.Debt can be acquired from a variety of sources. The firm must realize what is the debt-equity ratio to keep a track of the financial mix that is optimum for it.The firm should ... Read More