The Cash flow statement represents the increased or decreased position of cash and cash equivalents in a business Cash flow methods for Investment Appraisal can be broadly categorised into discounted cash flow and non-discounted techniques. In investment appraisal, “discounted cash flow” methods consider the time value of money by discounting future cash flows to their…
Trade Credits (TC) denote the credits extended by the overseas supplier, bank, financial institution and other permitted recognised lenders for maturity, for imports of capital/non-capital goods permissible under the Foreign Trade Policy of the Government of India. Depending on the source of finance, such TCs include suppliers’ credit and buyers’ credit from recognised lenders. The…
Common misconceptions about the cost of capital include believing it is solely the cost of equity, considering it a desired return rather than a required return, thinking it is a fixed number for a company, assuming retained earnings are “free,” and not factoring in the weighted average of different capital sources when calculating it (such…
Cost of capital is the cost of raising money for a business, while flotation costs are the fees a company pays when issuing new securities. Flotation costs are a factor in a company’s cost of capital. Cost of capital refers to the expense incurred by a company to fund its operations and investments. It encompasses…
Divisional and project cost of capital are the minimum rates of return required for projects or divisions that have different risk profiles than the company as a whole. For example, suppose a biscuit manufacturing company wants to start an ice cream manufacturing project. Can it apply the same weighted average cost of capital (WACC) from…
Definition of Optimal Capital Budget: The optimal capital budget for a company is the point where the cost of raising capital equals the expected return. This can be determined using the investment opportunity curve (IOC) and the marginal cost of capital (MCC) curve. The intersection of these curves represents the optimal capital budget, ensuring that…
Commercial Paper (CP) is an unsecured, money market instrument issued under section 45 W of the RBI Act. The corporates including Non-Banking Financial Companies and All India Financial Institutions (AIFIs) are eligible to issue Commercial Papers. Besides, other entities like co-operative societies/unions, government entities, trusts, limited liability partnerships, and other body corporates having a presence…
The marginal cost of capital (MCC) is the total combined cost of debt, equity, and preference shares, taking into account their respective weights in the company’s total value. This cost represents the expense of raising additional capital for the organization, aiding in analyzing various financing alternatives and making informed decisions. MCC, also known as the…
The weighted average cost of capital (WACC) is the average rate that a business pays to finance its assets. The purpose of WACC is to determine the cost of each part of the company’s capital structure based on the proportion of equity, debt, and preferred stock it has. Each component has a cost to the…
The Reserve Bank of India (RBI) defines a personal loan as a type of unsecured credit that individuals can obtain from financial institutions. Personal loans can be used for various purposes, including debt consolidation and moving expenses. These loans are repaid in installments, or regular payments, over a specified period. Key Characteristics of Personal Loans…
