Found 1748 Articles for Growth & Empowerment

Capital rationing is a strategy opted by companies that restrict the company’s investment in only one project at a given point of time. When several investments are available, the business needs to invest in the most profitable one.Companies that rely on capital rationing usually have higher return on investment. This is simply because the company chooses the option where profitability is guaranteed and at its maximum.Benefits of Capital RationingCapital rationing often leads to the most successful projects and hence it often guarantees the highest return on investment. Investors are interested in capital rationing because this gives them the idea of ... 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 theory of the net income approach suggests increasing the value of a firm by decreasing the overall cost of capital. The cost of capital in the theory is measured in terms of Weighted Average Cost of Capital (WACC). It can be done by incurring and collecting a higher proportion of debt because it is a cheaper source of finance in comparison to equity finance.WACC is the weighted average costs of equity and debts, and the weights are the units of capital collected from each source.According to the Net Income Approach theory, changes in the financial leverage of a firm ... Read More

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 More

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 More

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 More

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 ... Read More

Probability is the likelihood of an event to occur. It is impossible to guess some events whether will occur with 100% certainty and hence the use of the theory of probability is important. It tells us the certainty of an event to occur and how and why it will occur. Probability is an important theory in finance because most of the calculations in finance occur in the future for which probabilities of their occurrence are important to consider.Depending on the nature of calculation or determination, there are two types of probabilities. The one that uses history and data is known ... Read More

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 More