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 ... Read More

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 ... Read More

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 ... Read More

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 ... Read More

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 ... Read More

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 ... Read More

Free cash flow is the capital retained by a company after it has paid all its expenses, including building, rent, tax, payroll, inventory, etc. Companies may use the free cash flow for anything it sees fit.Free cash flow is a true measure of a company’s profitability.Businesses usually calculate free cash ... Read More

Product cannibalization is the process in which a new project or product eats away the cash flows earned by an already existing product. That means, when a new project or product is launched, it may take the cash flow away from an already running product or project. Business decisions must ... Read More

Financial distress is a situation in which a company cannot meet its obligations. In fact, companies borrow debts from investors for operations and growth. When the company performs badly, it may be unable to repay back the loans and funds it has borrowed from the lenders. This is called financial ... Read More

To better understand the two concepts of risk-adjusted and certainty equivalent methods, let’s understand what they mean and how they are useful for investors.What is Risk-Adjusted Discount RateThe risk-adjusted method combines an expected risk premium with a risk-free rate to calculate the present value of an investment.Risky investments include investments ... Read More