Beta-Beta is a measure of market risk and denotes the volatility or systematic risk of a portfolio or security when compared to the whole market (Myers, 2000). One of the most popular theoretical frameworks to measure the cost of capital is based on the Capital Asset…
n to compensate for the underlying risk involved .This rate of return (Ke) is defined as the sum of risk free rate of return (Rf) and risk premium (Rm- Rf) multiplied by beta (KPMG, 2005).Thus beta is useful in calculating the rate of return of a risky asset and thus very applicable in investment decisions.
2.2. Variance- It is a standard statistical measure of the dispersion of a set of data points around their mean value. In finance, the variance of the market return is the expected squared deviation from the expected return (Myers, 2000). Variance is useful in measuring portfolio risk in the sense that it measures the volatility from average value. This helps the investors in risk assessment while purchasing stocks or bonds (Investopedia, 2010).
2.3. Duration: It is defined as the average number of years to an asset’s discounted cash flows (Myers,2000).It denotes how much sensitive is the price of a fixed income investment to a change in interest rates. The bigger the duration, the greater the reward for bond prices. Thus this is applicable in investment decisions.
2.4. Return on Assets (ROA): It is defined as the ratio of net income to total assets (Myers, 2000). It indicates how efficiently a company is using its total assets to generate its earnings. It is an indicator of a company’s efficiency and profitability.
2.5: Return on Equity (ROE): It is defined as the ratio of net income to shareholder’s equity(Myers,2000). It an indicator of the profitability of a company. It shows how profitable a company is making use of the money invested by the shareholders
2.6. Cost of Capital- Each firm expects a minimum rate of return on its investments as earnings for attracting new capital and to maintain its current value. This rate of return is called cost of capital (KPMG, 2005). The opportunity cost of investment in funds is reflected in cost of capital and hence it is a very important parameter for any company (Civil Aviation Authority, 2001). The two ...
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(Financial Concepts Essay Example | Topics and Well Written Essays - 750 Words)
“Financial Concepts Essay Example | Topics and Well Written Essays - 750 Words”, n.d. https://studentshare.net/miscellaneous/408085-financial-concepts.
Finance Concepts and their Application. Financial managers play an important role in any organization. They are responsible for an organization’s financial resources. They are guardians of these funds and have a responsibility to invest these funds in a way that yields the highest possible return and at the same time providing liquidity to an organization.
Therefore, the manager may evaluate the relative weaknesses and strengths of his or her business. This comparison of business ratios to those of other similar businesses will indicate the weaknesses or strengths within a business (Albrecht, 2011).
Therefore, financial models are helpful in forecasting. Creating a financial model comes with challenges. There is minimal or historical information such the cost trends or sales that are based the types of financial model. In addition, many assumptions and the calculations have to built into a financial model that is being used1.
Fundamentally, we may differentiate these principles according to three arguments on the existence of financial intermediaries:
A. The argument on informational asymmetries - Market imperfections are generated because of the informational asymmetries like divergence from the neoclassical structure of financial system.
On the other hand, the non-current assets of WMT include fixed assets like property, plant and equipment acquired by the company for intended operations. In this section, the corresponding accumulated depreciation or depletion is deducted from the property, plant and equipment to account for the wear-and-tear of these fixed assets.
Advise to Dr. Leo Krusack on basic accounting procedures for the month of July showing how each transaction is handled on the accrual basis of accounting: - On July 1st, he paid out $1,200 in office rent for the month of July.
The Board is considering what might happen if the business reports this ratio to the bank. One solution is to report revenue from a new sales contract that is scheduled to take effect in January.
The author explains that Self Imposed Budget is known as a participative budget; it is a budget that is made with full participation and input from managers at all levels, thus naming it as participative. Input and participation of managers is an essentiality to proceed with success. The advantages is that the more concerned managers are involved.
The same applies to creditors, shareholders, creditors, employees, managers, the government and society who are interested in knowing the financial health of a company to be able to make informed decisions. The information that external users are interested in are usually
This also increased the risk of development of mutually inconsistent standards that violated the main objective behind preparation of financial statements. To meet the need of robustness and consistency in the financial statements, the conceptual framework was
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