Cut off point is base point at which investment proposal is accepted. It depends on risk of the investment proposal. If the proposal has high risk then, cut off point is high and if the proposal has low risk then, cut off point is low.Cut off rate is the lower ... Read More

The major differences between cash flow and free cash flow are as follows −SecuritizationIt is related with loans.It is something with loans.Medium or long term.Agencies will look after collections.Originator will take portion of credit risk.FactoringIt is related with book debts.It is something with bills receivables.Short term.Factor will look after collections.Factor ... Read More

The major differences between cash flow and free cash flow are as follows −Cash flowFinds operating cash inflow and activities of finance and investments of the business.Net cash inflows are calculated.Liquidity of company is determined.It has broad scope.Operating, investing and finance cash flows are used in calculating cash flows.It gets ... Read More

SolutionThe solution is as follows −Initial investment = Rs. 25000000/- Disposed value by analyst = Rs.500000/- Book value = Rs.375000/- Tax rate = 25%Tax rate for disposal => (500000 – 375000) * 25%                    => 125000 * 25%                    => Rs.31250/-After deducting taxes => 500000 – 31250                    => Rs.468750/-Terminal cash flows = after deducting taxes + working capital recovered                    => 468750 + 500000                    => Rs.968750/-

SolutionThe solution is given below −Total sales (in billion tons) – current = 16 Total sales (in billion tons) – proposed = 16 + 7 => 23Incremental cash flowsSalesCurrentDomestic sales => 8 * 80 => 640 Export sales => 8 * 120 => 960 Total current sales = 640 + ... Read More

SolutionThe solution is mentioned below −Fixed capital = $ 2000 Working capital = $ 200 Salvage value = $ 1600 Book value = $ 1200 Tax rate = 28%Initial cash flows = FC+WC-S + (S-B) * T                    = 2000 + 200 ... Read More

Initial cash flowsInitial cash flow is the cash required to start a project or business. This cash is estimated mainly at planning stages of a business or a project. Fixed capital, working capital, salvage value, tax rate, and book value are considered, while calculating the initial cash flows. Sometimes, the ... Read More

The factors influencing pattern on capital structure are as follows −EconomyIndustryCompanyEconomyMeasure of economy: Equity is preferred.Capital market: Funds availability depends on the market conditions.Taxation: Varies with different tax structures.Policy of financial institutions: Choosing of debt may change with change in policy.IndustryFrequent variations: Frequent variations in activities may lead to bankruptcy ... Read More

Finance manager has to decide the right combination of capital based on certain principles and available source of funds to maximize returns. Guiding principles of capital structure are as follows −Cost principleRisk principleControl principleFlexibility principleTiming principleCost principle −Main concern of this principle is to earn maximum Earnings per share with ... Read More

SolutionThe solution is as follows −Cost of debt=(Interest+(redemptionvalueofdebenture–issueprice)/maturityyear)(1−taxrate)(redemptionvalueofdebenture+issueprice)/2=(Interest+(redemptionvalueofdebenture–issueprice)/maturityyear)(1−taxrate)(redemptionvalueofdebenture+issueprice)/2Interest = 12 Redemption value = 110 Issue price = 80 Tax rate = 42% => 0.42 Maturity year = 2 yearsCost of debt ==(12+(110–80)/2)(1−0.42))(110+80)/2=(12+(110–80)/2)(1−0.42))(110+80)/2Cost of debt ==15.6695=15.6695Cost of debt = 16.48%Cost of preference capital=(dividendspershare+(netprice–(issueprice−floationcost)/redemptionperiod(netprice–(issueprice−flRead More