Articles

Internal rate of return (IRR)

Internal rate of return is method used for investment appraisal that calculates the rate of return that is expected to be achieved by the project. IRR is related with NPV method as it is the discount rate at which NPV is zero. if IRR > target rate (often WACC) → the investment adds value

Financial analysis indicators - financial structure and indebtedness

This series follows the series about Group of financial analysis indicators and describes in detail the indicators of financial structure and indebtedness.    

Advantages and disadvantages of financing by equity and debt

In business world, debt financing is paradoxically cheaper than from equity, because: the cost of debt is interest, which is lower than the dividend (profit sharing) paid to shareholders – it is mainly due to the fact that equity holders are satisfied in case of liquidation either after deb

Conditions for dividend payment

If the company wants to pay a dividend, it must at least: meet legal requirements arising from the statutory allocation to the reserve or other funds have a base to pay the dividend – mostly profit or retained earnings meet other legal requirements, for example that General Meeting took p

Discounting

Discounting is the method that transforms future value (future cash flows) into present value (PV).  Because of the time value of money concept, the present value of equivalent future value is lower because money possessed now is worth more than those earned in the future (it is not certain and

Systematic risk

Systematic risk is the undiversifiable risk to which are exposed all companies in the market. An example can be the risk of changes of most macroeconomic factors. (43) The fact that systematic risk cannot be diversified does not mean that it cannot be dealt with – it can be for example insured

Payback period (PP)

Payback period is the method used to evaluate investment projects. It comes out from relevant profit or cash-flows and calculates the number of years (months or other periods) during which will the invested amount be repaid from the relevant income or cash inflow. Generally, investments with shorter

Sources of finance

In general, sources of corporate finance can be summarized into the following groups: internal sources of finance – mainly retained earnings external sources of finance: debt – bank loans, issue of debentures, lease equity  - issue of shares Each source of finance be

Financial leverage

Financial leverage is the ratio of debt capital to total assets, i.e. the formula is the same as for the Debt ratio. The effect of financial leverage is one of the effects causing the fact that the use of debt capital can be more advantageous than equity. It has a positive effect in the case that r

Profitability index (PI) / Benefit-cost ratio

Profitability index is a method used for investment appraisal that is based on discounted cash-flow methodology. It calculates the present value of cash flows generated by the project per a unit of capital outlay. As such it is helpful in decision-making in situations when the company cannot un

Cost of capital

Cost of capital is the cost rate of the funds that the company uses as its capital, therefore the rate that mixes costs of various sources of finance. It usually has the form of Weighted Average Cost of Capital (WACC), but all the components mentioned below can be also called with the broader term &

Security market line (SML)

Security market line (SML) reveals the relationship between the level of systematic risk and the expected return and as such presents the outputs of Capital Asset Pricing Model (CAPM). The slope of the curve represents coefficient β. (42) SML line is used to derive expected (= well priced) ret

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