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

Sl. NoAccountsRefDebitCredit1Owners’ equity18002Owners’ drawings6003Equipment’s35004Sales34005Customers payment Dues6006Purchases15007Purchases returned5008Loan9709Creditors55010Taxes62011Cash in hand45012Note payable82313Inventory35014Repair42389667120SolutionThe solution is as follows −Sl. NoAccountsRefDebitCredit1Owners’ equity18002Owners’ drawings6003Equipment’s35004Sales34005Customers payment Dues6006Purchases15007Purchases returned5008Loan9709Creditors55010Taxes62011Cash in hand45012Note payable82313Inventory35014Repair423Total80438043Read More

Breakeven point (BEP) is a point where, there is no loss or no gain to the company. It is a point where, company starts earnings profits. Net income or earnings per share is zero. Fixed is independent of volume of sales and variable cost is dependent on volume of sales.FormulaWe ... Read More

SolutionThe solution is mentioned below −FVn = PV (1+r) ^nHere, PV = 5000, r =12%, n = 4 yearsFVn = 5000 (1+12%) ^4 FVn = 5000 (1.12) ^4 FVn = Rs. 7867.60/-b) Calculate the deposit after 12 years, if the investor deposited Rs. 80000 with 12% interest rate.FVn = PV ... Read More

If the interest is compounded, that means the interest which is earned at the end of year, will be added to principal and will go on till the end of time. Future values are calculated by using this compounding interest.As interest rates increases, compounding interest also increases, that means if ... Read More

The major differences between fixed interest rate and floating interest rate are as follows −Fixed interest rateInterest rates are high.Financial market conditions will have no effect on these rates.EMIs are fixed.By using these rates, it is possible to plan the budgets.It has sense of security.It is better for short or ... Read More

The major differences between simple interest and compound interest are as follows −Simple interestIt is the percentage interest on total principal amount.Low returns.Principal is constant.Growth of both principal and interest is constant.Interest will be charged only on principal amount.Easy to calculate.Formula: PTR/100.Compound interestIt is the percentage interest charged on principal ... Read More