Financial Management
What is Cost of Equity? The cost of equity is the return ( rate of return) a company pays to its equity investors or shareholders to compensate for the risk they undertake by investing their capital. The equity investors seek dividends and/or appreciation in the value of their investment (capital gain on share price). The current cost of equity is unobservable and must be
Continue reading What is Capital Rationing? Capital rationing is restricted on the amount of new investments or projects undertaken by a company.There are two types of capital rationing. The first type of capital rationing is referred to hard capital rationing.This occurs when a company faces issues raising additional funds, either through debt or equity. The rationing arises from an external factors , and
Continue reading What is Value at risk Value at Risk (VaR) is a measure of the risk of investments. It estimates how much a set of investments might lose, given normal market conditions, in a set time period such as a day. VaR is defined as for a given portfolio, time horizon, and probability p, the p VaR is defined as a threshold
Continue reading Option Pricing Theory The most used models are the Black-Scholes model and the binomial model. Both theories on options pricing have margins for error because their values are derived from other assets, usually the price of a company’s common/share stock. Binomial option pricing model The binomial option pricing model assumes a perfectly efficient market. Under this assumption, it is able
Continue reading The break-even point (BEP) The break-even point (BEP) is the point at which total cost and total revenue are equal. There is no net loss or gain. In short, all costs that must be paid are paid, and there is neither profit nor loss
Continue reading Present Value with Supernormal Growth Rate Time Line Which Ct+1 = Ct(1+g)1 Ct+2 = Ct(1+g)2 Ct+3 = Ct(1+g)2 ……………………………………………………………………………………………… So present value is summarized as follows:
Continue reading Present Value with the Two-Stage Growth Rate This model assumes the future cash flows will grow at different rates for the different periods. Present value with the two-stage growth rate is often applied to find present value or current price of ordinary share (common stock). Time Line Constant growth rate g1 during a first stage of growth from period 0
Continue reading Present Value with Constant Perpetual Growth Rate Present value with constant perpetual growth rate is often applied to find present value or current price of ordinary share (common stock). Time Line Which C0 : base amount at the beginning of period 1 (Period 0) for constant perpetual growth rate g: constant perpetual growth rate Question The XYZ Co. has just
Continue reading Present Value with Constant Growth Rate Present value with constant growth rate is often applied to find present value or current price of ordinary share (common stock). Which C0 : base amount at the beginning of period 1 (Period 0) for constant growth rate g: constant growth rate Question Mr. BB want to invest stocks from NNM Company. Suppose that
Continue reading Present Value of Perpetuity Due The word perpetuity is an annuity in which the cash flows continue forever. The cash flows due occur at the beginning of the each period. Time Line
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