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Articles by Probir Banerjee
Page 21 of 45
Difference between Strategy and Strategic Management
What is Strategy?Strategy is specifically an action the managers of a company take to attain a specific goal. It can also be defined as a general direction set for the company and its various departments to attain a desired state in the future. To apply a strategy, a company must follow a strategic planning process.Strategy, in general, means integrating the organizational processes and using and allocating the scarce resources in the organizational environment so that the present objectives are met in a wholesome manner.While planning a strategy, it is required to consider the fact that decisions are not made without ...
Read MoreWhat is Debt Capacity? How does a firm decide its Debt Capacity?
Businesses often need to source funds through debt and equity. Since equity cost is more than debt costs, organizations tend to choose debt over equity in their capital structure. Debt comes with a cost though because the companies need to pay interest to the lenders when they acquire debt. The interest they need to pay back is the minimum return they should earn to remain solvent in the long run.What is Debt Capacity?In general, a company should have all the funds required to pay back the minimum required amount of debt or contractual obligations. The amount of debt that can ...
Read MoreWhat is Interest Tax Shield?
A company’s interest payments are tax deductible. That is, the interest expense paid by a company can be subject to tax deductions. Such a deductibility in tax is known as interest tax shield. For example, there are some cases where mortgages have an interest tax shield for the buyers as the mortgage interest is deductible on the income.Companies normally want to reduce their tax liability as much as possible. Interest tax shields therefore encourage firms to finance their projects with debt, as the dividends paid to the equity investors are not tax deductible.Valuation of the Interest Tax ShieldThe valuation of ...
Read MoreEffects of Financial Leverage on the Trend of Stock Volatility
What is Financial Leverage?Financial leverage is the use of increasing debt to purchase more assets. Leverage is usually employed to increase the return on equity (ROE). However, an excess of financial leverage magnifies the risk of failure, as it becomes increasingly difficult to repay the debt by the borrower.Financial leverage is measured as the ratio of total debt to total assets in its formula. When the proportion of debt to assets increases, the amount of financial leverage does so too.Financial leverage is favorable when debt can be put to generate returns greater than the interest expense related to the debt.Many ...
Read MoreWhat is EBIT-EPS Analysis?
The EBIT-EPS analysis gives the best ratio of debttoequity which the businesses can use to find an optimum balance in their debt and equity financing. The analysis shows the effect of the balance sheet’s structure on the company’s earnings.Basics of EBIT-EPS ApproachIt is important to understand what EBIT and EPS mean to understand what the analysis is meant to be.EBIT refers to earnings before interest and tax. The metric makes interest and taxes irrelevant. Therefore, an investor can understand how the company is performing out of the balance sheet’s composition which essentially makes interest and taxes the focal point of ...
Read MoreWhat is the Certainty Equivalent Method?
Certainty equivalent is the amount of cash an investor would accept today than going for a larger amount of cash tomorrow. Investors often use this to deny the risk. The Certainty equivalent helps investors earn a guaranteed income on their investment rather than going for increased risk on their investment portfolios. It is a method of reducing risk while also reducing the income from given investment instruments.Certainty Equivalent is Popular among Risk-Averse InvestorsCertainty equivalent is quite a popular method among risk-averse investors. These investors do not want to invest in high-return but risky investments. Instead, they forgo higher returns for ...
Read MoreHow does Financial Leverage affect financial risk?
A company’s financial leverage is its dependence on debt. It can impact the company’s return on equity (ROE) positively or negatively due to the increased risk probability.Impacts of Financial LeverageAs an individual or a company will have to pay back the debt, it will always bring about a heightened level of risk. The income an individual or a company earns must be used to pay back the debt, even if the earnings or cash flows go down.From a firm’s perspective, the use of financial leverage (debt) can positively – or sometimes negatively – impact the ROE due to an increased level ...
Read MoreWhat is an Embedded Option? Types of Embedded Options
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 MoreWritten Down Value (WDV) Method of Depreciation
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 MoreHow should Inflation be treated in Investment Evaluation?
Inflation is an important parameter in investments, as it erodes the value of money. It must be included in capital budgeting so that cash flows are appropriately included in the evaluation of an investment. In doing so, the inflation targets must be forecasted accurately over a considerably longer duration.Here are some considerations that must be made while creating inflation in an investment evaluation process.The forecasts must be spread over a periodInflation is an ever-existing truth nowadays. Investors face this reality day-in and day-out. They want to gain a return that is more than the inflation rates so that the value ...
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