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Banking & Finance Articles
Page 43 of 102
What is the difference between "profit" and "cash flow from operations"?
Both "cash flow" and "profit" are vitally important for businesses and there are distinctions and notable differences between the two. As a business owner, taking cash flow for profit can be a serious mistake. While a company can be highly profitable with a little cash flow, some companies may have high cash flows yet are less profitable.Cash FlowCash flow in brief is the amount of money that comes into, through and out of the businesses over a set period. Credit from suppliers, money owed to debtors, and cash in bank are not included in cash flow. It is completely concerned ...
Read MoreWhat is the cost of preferred stock?
What is Preferred Stock?Preferred stock is used to fund expansion projects or improvements that firms seek to engage in. Like all other equity capital forms, selling preferred stock helps companies to raise funds.Preferred stock does not dilute the ownership stake of common shareholders, as preferred shares don’t hold the same voting rights that common shares do.What is the cost of preferred stock?The price of the preferred stock is the price the company pays in return for the income it gets from the issuance and sale of shares. It is the money a company pays in a year divided by the ...
Read MoreWhat does a positive Net Present Value (NPV) imply?
The Net Present Value (NPV) is a measure of an investment’s profitability. It can be either positive or negative. Positive NPVs are preferred because they point toward a profitable investment, while negative NPV investments are rejected as they show large losses.NPV is important because it is the best rule to determine the profitability of an investment project. NPV is the most important investment rule for the following reasons.Note − A positive NPV implies that the profitability of a firm in the present time and unit exceeds the NPV of another in the same time and unit.The Time Value of MoneyNPV ...
Read MoreValue Additivity Principle in the NPV method
The Value Additivity Principle in NPV states that the value of the total NPV of a bigger project is equal to the summation of all smaller NPVs of projects. In other words, the summation of all smaller NPVs provides the bigger NPV of an investment project. The NPV of a group of the independent projects will be equivalent to the NPV of all the independent projects.If A and B are two smaller projects, then the total NPV of the bigger project (A+B) would be −NPV (A+B) = NPV (A) + NPV (B)Value Additivity is an important principle because using it, ...
Read MoreMerits and demerits of using NPV as an investment evaluation method
Net Present Value or NPV is a true measure of an investment’s profitability and gain. However, like all the other methods, the NPV calculation has its own merits and demerits.Merits of NPV MethodFollowing are the merits of using the NPV Method as an investment evaluation method −NPV deals with the time value of money. According to the time value principle, a rupee today is more in worth than a rupee tomorrow. Including time value helps the principle earn true profits on a future date.NPV is the measure of true profitability as considers all cash flows of the investment. Estimating and ...
Read MoreWhy is Discounted Cash Flow (DCF) Method not suitable for valuing stock options?
The Discounted Cash Flow (DCF) method is a widely used technique for valuation in the financial world. The extended procedure of Net Present Value (NPV) is an exclusively used technique in valuing capital investment projects. These projects usually cover the purchase of machinery and equipment as well as the valuation of businesses in cases of mergers and acquisitions (M&A).The DCF method may be quite popular, but it has a major flaw: it does not show any flexibility of cash flows. In the real world, capital investment projects can be changed at any time, and hence, the DCF technique is worthless ...
Read MoreWhy are Capital Budgeting Decisions considered important for a firm?
Capital Budgeting Decisions are critical in nature, and they are complex too. Capital budgeting decisions are not taken frequently and since large funds are involved, the decisions must consider the long-term impact on the profitability and cost structure of the firm.Another important note about capital budgeting decisions is that they are irreversible in nature. Therefore, capital budgeting decisions have to be taken after thorough analysis and research.The significance of capital budgeting decisions can be categorized into the following five subjects −GrowthCapital budgeting decisions are important because they extend the growth of a company. The decisions are taken to make the ...
Read MoreRules to be followed while making Investment Decisions
Usually, the investment decision rules are known as capital budgeting decisions or investment criteria. To determine the financial worth of an investment project, sound capital budgeting rules should be followed.The most important property of a good capital budgeting technique is that it should maximize shareholders’ wealth. However, there are some other rules too that must be followed for making an investment decision. These include the following −An investment decision should address all cash flows to determine the correct profitability of a project. This should include all cash inflows and cash outflows. Usually, the calculation of cash flows is a necessary ...
Read MoreWhat is the difference between Independent and Contingent Investments?
In finance and economics, investments have been categorized into various sectors. Independent and contingent investments are two broad subjects of investment decisions. Usually, there is no relation between independent and contingent decisions, but they may be considered two broad aspects of investments that determine the nature and characteristics of investments altogether.As the names suggest, independent investments are independent in nature, while contingent investments are related to some other types of investment.Independent InvestmentsIndependent investments are free from the influence of any other related investments. It is done singularly and executed for the benefit of the firm undertaking the investments.Independent investments may ...
Read MoreWhat is Delta in stock options contracts?
Delta is the measure of price movement of an options contract when the value of the underlying stock moves ${\$}$1 in value. Many people would assume that the value of an option will also move ${\$}$1 when the value of the underlying stock moves ${\$}$1. However, this is not true. As the cost of an option is much lower than the collective value of the underlying, the value of an option will change less than ${\$}$1 when the price of the underlying changes ${\$}$1.Call Options have Positive DeltaUsually, calls have a positive delta. For example, if the value of delta ...
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