It has often been a matter of managerial decision-making to state the link between strategy and capital budgeting. As capital budgeting is one of the most important decisions organizations make, the effect of strategy on them is a matter of interest for all stakeholders. The strategy may not be the only requirement that drives the capital budgeting process, but there is a very solid link between the two.In fact, the strategy offers a higher level of screening and integration of resources in a capital budgeting procedure. It may not be accounted for in the regular accounting or DCF method, but ... Read More

Operating leverage is a component of fixed costs. Companies that have higher operating leverage or the firms with a lower fraction of variable cost and higher portion of fixed costs have higher operating leverage. This means that most of the costs cannot be scaled down in the phases of declining sales. Such an arrangement increases the risk and makes it increasingly hard to forecast the sales.However, operating leverage is not bad in all situations. While it can magnify losses in periods of lower sales, it can do the same to profits when good business conditions prevail.Operating Leverage and SalesWhen sales ... Read More

The arbitrage process is the backbone of the ModiglianiMiller (MM) hypothesis. However, since the hypothesis assumes a perfect market where arbitrage behavior is different from the practical market scenario, some discrepancies may occur at the core level of the process.Arbitrage may fail to work or work erroneously and may give rise to discrepancies between levered and unlevered firms. The arbitrage process may fail to bring an equilibrium in the process due to the following discrepancies −Landing and Borrowing Rate DiscrepancyThe hypothesis states that individuals and firms can lend and borrow at the same interest rate. However, this is not the case ... Read More

Risk and uncertainty are often used interchangeably in financial management literature. However, there are differences between the two and they represent strictly different ideologies. In this brief article, we will highlight the points that differentiate these two terms, risk and uncertainty, when they are used in Finance parlance.The Concept of RiskRisk is the process of potential loss for a firm. The concept of risk is broad in finance. In finance, the risk is associated with a bad outcome occurring or a good outcome not occurring at all. For instance, If the income falls down below a certain mark, it is ... Read More

The concept of block of assets can be considered under the concept of depreciation of assets under the Indian Tax rules. Let’s go through the concept of depreciation under income tax rules to understand the concept of ‘block of assets’ better.Depreciation under Indian Income Tax RulesDepreciation under Indian Income Tax rules is a deduction allowed by the government for the reduction of the value of assets used by a taxpayer. It is a continuous process and is usually calculated over the useful life of the assets.DepreciationDepreciation is the gradual loss of value of an asset. Under Indian Income Tax rules, ... Read More

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 ... Read More

A simulation is basically a computer model that attempts to replicate a reallife situation. In Finance, simulation analysis is a model that is applied to analyze large projects and determine how target variables are affected based on changes in input variables. The model uses simulations to predict how the outcome of a decision would vary if we tweak a set of input variables in a given range.Unlike scenario analysis and sensitivity analysis, simulation analysis does not offer a single result. Instead, it offers a range of probable outcomes due to the movement of variables.In simulation analysis, each input’s statistical distribution ... Read More

The only thing certain in life is uncertainty. Scenario analysis is a powerful tool to handle business uncertainty in a scientific and appropriate manner. It is done by analyzing the future events and their impacts on the business and considering the alternative possible outcomes. Companies normally use a broad range of spectrum of future situations such as risks and cash flows to determine the scenario of the business at a future date. Therefore, it is an intriguing process for analysts because it offers an insight into the future.What is Scenario Analysis?Businesses need to consider various scenarios from good to best ... Read More

When risk premium is added with risk-free rate to get the present value of a risky investment, it is called risk-adjusted discount rate (RADR). A risky investment refers to any investment that has a higher risk than normal investments. For example, high-risk investments may include real estate and other such investments.As investors want to know the present value of risky investments, the riskadjusted discount rate is a highly efficient tool for them. Although the market rate is taken as a standard in investment return calculations, the application of riskadjusted discount rate calculations becomes instrumental in some other cases.How Does RADR ... Read More

M&M TheoremThe first version of the M&M theorem (or M&M Theorem I) considers a perfect and hypothetical market condition. In such a case, the market is completely efficient, which implies the markets are working smoothly with all information being conveyed to the investors taking part in it. The theorem also considers that there are no taxes, no trading costs of equity, and bankruptcy being applicable without bankruptcy costs.The Key Assumptions of M&M TheoremThe theorem follows certain assumptions depending on the market conditions, risks, tax liabilities, and dividend payout. The assumptions are as follows −Perfect Capital MarketsThe perfect market condition applies ... Read More