The method that is used to calculate the cost of capital for divisions can also be used to determine the cost of capital of projects. It’s hard to find comparable projects that resemble each other in all aspects. The risk profiles of companies depend on their operating leverage. This should ... Read More

Although being a disputed matter in the financial world, the cost of capital is an important measure that helps the managers in decision-making in the correct manner. The following are the reasons why the cost of capital is an important measure −Evaluation of InvestmentThe cost of capital is used in ... Read More

The Dividend Growth ModelThe dividend growth model is an approach that assumes that dividends grow at a constant rate in perpetuity. The value of one stock equals next year's dividends divided by the difference between the total required rate of return and the assumed constant growth rate in dividends.In other ... Read More

The cost of capital is the lowest rate of return the companies should earn before generating value. Before earning profits, a company must generate sufficient income to cover the cost of capital it uses to fund the operations.The cost of the capital contains both costs of debt and the cost ... Read More

The Accounting Rate of Return (ARR) is a widely used technique for investment evaluation. However, like all other measurement processes, it has both merits and demerits.Merits of Using ARRFollowing are some of the merits of using ARR in evaluating an investment −Simplicity − The ARR method is one of the ... Read More

Despite being a popular tool of investment evaluation, payback is not applicable in all investment evaluation projects. In this article, we will highlight some of the shortcomings of using the Payback Period in evaluating an investment.Cash Flows after PaybackThe payback period fails to consider the cash inflows after the payback ... Read More

There is a broad difference between external equity or new issue of shares and internal equity which is retained earnings. The cost of equity is applicable to both external as well as internal equity. Both have many other similarities too, however in this article, we will highlight the major differences ... Read More

CAPM is often used by accountants and financial analysts to derive the cost of shareholder’s equity. As a relation between systematic risk and expected return on assets, CAPM is often used as the pricing model for riskier securities. CAPM model generates expected returns for assets which are used to calculate ... Read More

Modified Internal Rate of Return, commonly known as MIRR, is an investment evaluation technique. It is a modified version of the internal rate of return (IRR) that overcomes some of the drawbacks of IRR.MIRR is normally used in capital budgeting decisions to check the feasibility of an investment project.For example, ... Read More

Companies often need to make investment decisions at some specific points in time. Incremental cash flow helps find the better project to invest the money in, as it helps the companies generate incremental income from the investments.In general, investors and lenders are interested in finding out the future cash flows ... Read More