Investors have different options to invest their money in stock markets. One of them is the options category of securities in which they trade their securities at agreed date and price.Options are sub divided into the following −Call optionIn this option buyer has the right to buy assets at strike price at a particular date. To acquire call option investors have to pay some upfront cost call premium through which they can get the right to purchase a product at a fixed price on a particular date. Stocks, currencies, bonds etc. covered in call options.ExampleLet’s say, a buyer and seller ... Read More

Both options and swaps are derivatives of financial instruments. Both values depend on the underlying asset.OptionsRight to buy or sell the asset at a pre agreed price at a particular date. Important terms used in this are exercise date, strike price and option premium. It is in the non-recoverable amount.Exercise date - Date on which option should be exercised.Strike price - Price at which option should be exercised.Option premium - Price paid to acquire option.The types of options are as follows−Call option - At pre agreed date and price, buyer has right to buy financial asset.Put option - At pre ... Read More

Financial derivatives are categorized into forward contracts, futures contracts, options and swaps. Futures can be understood as legal binding of trade at a future date at an agreed price. On the other hand options are investors have the right to buy or sell products in stipulated time at pre specified price.Future contractFuture contract is the contract between involved parties to buy or sell financial assets at a set price at a future agreed date. Key elements in future contracts are date, buyer, seller and price.These are transferable and standardized contracts. These are traded in NYSE/NASDAQ/BASE/NSE. It includes currencies, stocks, commodities ... Read More

Let us learn about the tort and contract before understanding the differences between them.ContractIt is a set of promise/promises which is legally enforced between parties. These are enforceable if any party is affected or injured then they are allowed to access legal remedies.A contract consists of offer, acceptance of offer and considerations and mutual agreements. According to contract law, it recognizes and governs rights and duties which arise from agreements or contracts between parties.Some contracts can be orally binding. Formalities in most contracts are signing, entering date of signed contractTortTort is nothing but any wrongful act which leads to legal ... Read More

Before going for comparison between bid and offer price, let us first try to understand the concept of bid price and offer price with an example.Let us a vendor offer a price for a T-shirt of Rs.500/- and the customer starts bidding at Rs.300/- then spreads the value of Rs.200/- . In reality bid amount and incremental changes are not the same.From the above example, the customer will not bid directly 300/-, initially he will go for less than 300 and gradually he ends up in 300 and ends the bid. If there is only a single bidder then the ... Read More

SolutionThe solution is explained below −Using the annuity tableRate for 4% for 10 years will be 0.130Annual depreciation charge = 200000 * 0.130 => 26000                    Lease accountDebit sideCredit sideYearYear1To cashTo interest20000080001920001By DepreciationBy Balance c/d260001660001920002To balance b/dTo interest16600066401593602To DepreciationTo balance c/d260001333601593603To balance b/dTo interest13336053341280263To DepreciationTo balance c/d260001020261280264To balance b/dTo interest1020264081979454To DepreciationTo balance c/d2600071945979455To balance b/dTo interest719452878690675To DepreciationTo balance c/d2600043067690676To balance b/d43067Year 1Debit side: Cash – interest => 200000 – (200000*4%) => 200000 – 8000 => 192000Credit side: 192000 – Depreciation amount => 192000 – 26000 => 166000Year 2Debit side: balance – interest ... Read More

Return on investment Operating leverage Financial leverage Combined leverageRs.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 ... Read More

SolutionThe solution is given below −Interest cost = 12% (250000) = 30000/- Earnings = EBIT – Interest cost = 50000 – 30000 = 20000/- (no tax rate) Shareholders earnings = earnings Shareholders earnings = 20000/- Market value (equity) E = shareholder’s earnings/ cost of equity Market value (equity) E = 20000/16%= 125000 Market value (Debt) D = 250000/- Market value (total) = E + D Market value (total) = 125000 + 250000= 375000/- Cost of capital = EBIT/ market value (total) Cost of capital = 50000/ 37500 = 13.33% Degree of financial leverage ... Read More

Capital structure plays an important role in value of a company. Different companies have different capital structures like some have capital based on debt, some have based on equity and some have a mixed or combination of both in their financial mix.Durand proposed net income approach and he states that change in cost of capital and valuation of company will change, if there a change in financial leverage. Capital structure is relevant to valuation of a firm. Increase in financial leverage leads to increase in weighted average cost of capital (WACC) and value of firm will increase.Market value of equity ... Read More

The major differences between net operating income and net income are as follows −Net operating incomeNo relevance in capital structure.Degree of leverage is irrelevant to cost of capital (assumes).It has constant cost of capital.Equity value is residual.Changes perception of investor with increase in debt.Net incomeRelevance in capital structure.Change in degree of leverage will change WACC (assumes).No taxes.Cost of debt is less than cost of equity.Change in debt will not change perception of investors.