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Understanding the Concepts - Essay Example
Author : kihnnelson
Finance & Accounting
Pages 4 (1004 words)
While making financial plans for any business, it is highly necessary to understand certain concepts related to the financial topics. This is primarily because in case of business, matters of investments and returns are of serious concerned issues…
Concept of NPV/Payback Rule: The concept of NPV or Net Present Value of a particular investment represents the difference in its market value and its actual cost. The value of NPV is determined by estimating the present value of those cash flows that shall take place in the future. The cost is then deducted from the resultant to obtain the value of the NPV. According to the payback rule, a particular cutoff is selected and if the payback period is less than that cutoff, the project proves to be good to undertake. A payback period represents the time period when the cost of the project becomes equal to the total sum of the investments made on the project (Ross, Westerfield & Jordan, 2008, p.290). Thus, these two concepts can be utilized in the business in order to determine whether the investments made on the project and the costs being incurred are on a right track to provide the owner with sufficient returns.
Advantages and Disadvantages of Debt Financing and Issue of Stocks over Bonds: The first advantage of debt financing is that a business only requires repayment of the borrowed amount but it is the owners who are accrued for any rise in the firm’s value. Secondly, debt is less costly in comparison to equity and carries lesser amounts of risk. Thirdly, the availability of debt financing is more frequent and easy than equity financing. The disadvantages of debt financing lie with the fact that debts have to be cleared even if the firm has undergone any losses in its finances. ...