Sequential analysis deals with the sequence of events an investment process follows instead of just accept or reject a process. Sequential analysis is more relevant in practice because it shows all the probable events in terms of a decisions tree that constitutes the probability of an outcome generated in the ... Read More

As financial planning and policymaking are of top priority for firms, they must use proper scrutiny and analysis of the following elements of capital structure −Capital MixMaturity and PriorityTerms and ConditionsCurrencyFinancial InnovationsLet's check the importance of each of these important elements of capital structure in detail.Capital MixFirms often need to ... Read More

Capital rationing is a strategy opted by companies that restrict the company’s investment in only one project at a given point of time. When several investments are available, the business needs to invest in the most profitable one.Companies that rely on capital rationing usually have higher return on investment. This ... Read More

The theory of the net income approach suggests increasing the value of a firm by decreasing the overall cost of capital. The cost of capital in the theory is measured in terms of Weighted Average Cost of Capital (WACC). It can be done by incurring and collecting a higher proportion ... Read More

Qualitative factors play an important role in capital budgeting decisions. Although capital budgeting relies more on quantitative measures, there are abrupt influences of qualitative factors on capital budgeting decisions. Qualitative factors are not expressed in capital budgeting decisions (unlike quantitative factors), however, in terms of context, qualitative factors are equally ... Read More

The valuation approach of capital structure is one of the ways capital structures are formed with debt and equity. In fact, shareholders have more risk than debt holders because the cost of equity is higher than the cost of debt. In such situations, owning debt is cheaper than owning equity. ... Read More

The decision tree analysis process is an extremely useful tool to calculate sequential investments. As we determine the branches of the decision tree, we can work backward, from future to present to cancel the unprofitable alternatives. By doing so, we can keep only the profitable investment options in our hands.Therefore, ... Read More

Due to the importance of qualitative factors, judgment plays a significant role in capital budgeting. Judgment may seem to be a matter of fancy to many, but its roots are strongly planted in the facts. Decision-making is no different; it must rely on judgment most of the time when it ... 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 ... 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 ... Read More