Operating risk is associated with a company’s cost structure. It is the risk a company faces due to the level of fixed costs in the company’s operations. As the name suggests, operating risks are associated with the operations of the business. This may include risks due to failure of fixed ... Read More

Operating leverage is a tool that measures a company’s fixed costs as a percentage of its overall costs. It is often used to evaluate the breakeven point of a business and the profit from overall sales. When expressed as the degree of operating leverage (DOL), it represents a financial ratio ... Read More

Financial risk refers to a condition where a company with a certain amount of debt will fail to repay them in a given time period. In other words, financial risk means the risk of losing money by investing it in a lossmaking company.Investors usually remain averse to risky companies and ... Read More

Meaning of Capital StructureCapital Structure is the ratio of different types of securities raised by a firm as its long-term finance. Capital structure decision involves two philosophies −Type of securities to be issued in capital structures must be equity shares, preference shares, and long-term borrowings (Debentures).Relative ratio of the securities ... Read More

Payback period or simply payback in capital budgeting refers to the time required for the ROI (Return on Investment) to repay the original sum of investment.Payback is a preferred tool because it is easy to understand and apply, irrespective of whether the manager is aware of financial calculations or not.Payback ... Read More

Payback is a method related to capital budgeting. The payback period in capital budgeting refers to the time required for the return on an investment (ROI) to "repay" or pay back the total sum of the original investment.Payback is a popular method of evaluation of investment because it is easy ... Read More

The "discounted payback period" is a modification of the simple payback version where the time value of money is considered in the calculation. In discounted payback period calculation, different metrics are used to measure the amount of time the project will take to "break-even."In some cases, the discounted payback is ... Read More

All typical investments have the following three types of cash flows −Initial investmentYearly net cash flowsTerminal cash flowsInitial InvestmentThe initial cost is the cost of assets in the beginning phase of a project. It is the net outlay in the given period when an asset is purchased.Gross Outlay or Original ... Read More

The Profitability Index (PI) shows a parallel between the expenses and profits of a certain project. It is obtained by dividing the net present value of the property’s future cash flows by the initial investment.When the profitability index is over 1.0, it is positive and the investment will generate profits.If ... Read More

The "cost of debt" can let one understand what they are paying for the benefit of having fast access to cash. The cost of debt is calculated by adding up all loans, balances on credit cards, and other financing tools the company has. The interest rate expense for each year ... Read More