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Articles by Probir Banerjee
Page 18 of 45
Debt Rebalancing in Free Cash Flow Approach
The WACC concept assumes that debt is always a constant proportion of the value of a project. This means that with the changes in project value, the debt value must change to keep the WACC value as it is. For example, with a debt proportionality value of 60% for a project, the value of debt must remain 60% of the project value each year. This means that even with reducing project value, the amount of debt value should change in a proportion of 60%.Why Do We Need Debt Rebalancing?We need to tweak the debt proportion value in order to keep ...
Read MoreWACC method in determining the value of a project
The WACC method is not directly used to determine the value of a project. However, the hurdle rate of a project can be determined by using WACC which can then lead to determine whether a project can be viable for a company to a new project. The underlying assumption in using the hurdle rate of a project includes the following.No Change in Capital StructureConstant capital structure means that the debt-to-equity ratio remains the same over the entire period of the project. In case WACC is to be used in determining the hurdle rate, then the capital structure should remain the ...
Read MoreWhat are the elements of a sustainable growth model?
The financing policies of a company usually need to be sustainable and feasible in the long term. Companies want to make decisions that may make financial policies more feasible and sustainable. The measures opted for this must ensure that the growth of the company is in sync with the policies set by the company. The policies that need to be followed for sustainable growth are included in the sustainable growth model of a company.Assumptions of Sustainable Growth ModelThe sustainable growth model aims to achieve long-term financial goals by managing the different elements of the model. The sustainable growth model is ...
Read MoreCritical factors in determining the Capital Structure
Apart from Earning Per Share (EPS), value, and cash flow, there are additional factors that need to be considered while determining the capital structure of a company. Some of the most common factors are as follows −AssetsIf a company has more tangible assets, its chances of financial distress automatically goes down. Lenders can use the tangible assets to realize their funds by liquidating the assets in the case the company goes bankrupt. Hence, companies that do not have many tangible assets have debt at a costlier rate.Growth OpportunitiesThe companies with higher market-to-book value have a larger share of intangible assets ...
Read MoreWhat is meant by Financial Slack?
Financial Slack is the Unused Debt CapacityBusinesses go through various conditions in their lifetime. There are times when companies earn high income which can be termed as profits or growth of revenues. On the other hand, some companies may go through a downturn in sales, profits, or revenues. In order to sail through such conditions, a company must have extra money. This extra money that can be used when the company is in trouble is known as the financial slack of the company.Financial slack is the untapped debt potential of a company. It may be availed from unused debt capacity, ...
Read MoreWhat are some forms of Financing Effects?
Financing effects are special kinds of considerations made for the companies or individuals who are weaker in terms of finances and may find it hard to obtain debt from the markets. The intention of financial effects is to help companies and individuals mitigate the financial burdens that may arise from time to time.Here are some prominent forms of financing effects.Subsidized LoansIn case of a subsidized loan, the lender pays the interest portion of the loan, reducing the burden of the borrower who may find it hard to pay back the interests on a loan taken for a certain reason, such ...
Read MoreWhat is risk-free debt and what is its beta?
Risk-free Debt is HypotheticalRisk-free debt is a hypothetical condition where the risk associated with the debt is zero. In general, there is no such thing as risk-free debt. While the risk of debt may go up and down in comparison, it can never be zero in any condition. This is apparent from the government bonds which carry minimum risk but not risk-free.Even when a collateral is issued against the debt resourced, the debt does not become risk-free. Investors should be aware that the company may be unable to provide the debt back in case of bankruptcy.It is notable that the ...
Read MoreFactors that affect the Free Cash Flows of a company
The Free Cash Flow of a company depends on the following factors −Sales ProjectionExpense EstimationDepreciationCapital ExpenditureChanges in Net Working CapitalInterest ExpensesTax RatesInflationLet us discuss each of these factors in detail and see how they affect the Free Cash Flows of a company.Sales ProjectionTo determine the Free Cash Flow of a company, the first step is to determine its projected sales.Sales depend upon many factors, such as market share, growth, and demand of products in the market.A company cannot remain at one stage in terms of sales. There are normal, super-normal, and declining growth phases of a company.An analyst dealing with ...
Read MoreWhat is meant by Debt Rebalancing?
Debt rebalancing is a process of rebalancing the debt while calculating the Weighted Average Cost of Capital (WACC). The concept of WACC is based on the assumption that WACC remains constant throughout the lifetime of a project. It also depends on the fact that debt proportionality remains the same over the course of years of a project.As WACC remains constant throughout the lifetime of a project, the debt will go down each year according to WACC.As WACC remains constant over the years, to keep the debt proportionality constant, debt has to be rebalanced to keep the WACC constant.This change in ...
Read MoreWhat is Terminal Value of a new business and how is it calculated?
Terminal Value (TV) is the value of an investment after the end of its initial forecast period. It is often estimated in the discounted cash flow (DCF) method as a way to account for the value of the firm after the end of its initial forecast period.The value of a firm is its present value of the estimated future cash flows. To determine the terminal value, an analyst would need to estimate the future cash flows. Due to the inability of forecasting the future, the future values cannot be known with complete certainty.The further the forecasts, the less inherently correct ...
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