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Profitability ratios measure the company's use of its assets and control of its expenses to
generate an acceptable rate of return
OR
Note: Operating income is the difference between operating revenues and operating
expenses, but it is also sometimes used as a synonym for EBIT and operating profit.
[10]
This is true if the firm has no non-operating income. (Earnings before interest and
taxes / Sales[11][12])
Profit margin, net margin or net profit margin[13][14]
OR
Note: this is somewhat similar to (ROI), which calculates Net Income per Owner's Equity
Cash flow return on investment (CFROI)
Efficiency ratio
Net gearing
Cash ratio[18]
Operation cash flow.
Average collection period[3]
DSO Ratio[19]
Asset turnover[20]
Debt ratio[24]
OR
The primary market is that part of the capital markets that deals with the issue of new securities.
Companies, governments or public sector institutions can obtain funding through the sale of a
new stock or bond issue. This is typically done through a syndicate of securities dealers. The
process of selling new issues to investors is called underwriting. In the case of a new stock issue,
this sale is an initial public offering (IPO). Dealers earn a commission that is built into the price of
the security offering, though it can be found in the prospectus. Primary markets creates long term
instruments through which corporate entities borrow from capital market.
This is the market for new long term equity capital. The primary market is the market
where the securities are sold for the first time. Therefore it is also called the new issue market
(NIM).
In a primary issue, the securities are issued by the company directly to investors.
The company receives the money and issues new security certificates to the investors.
Primary issues are used by companies for the purpose of setting up new business or for
expanding or modernizing the existing business.
The primary market performs the crucial function of facilitating capital formation in the
economy.
The new issue market does not include certain other sources of new long term external
finance, such as loans from financial institutions. Borrowers in the new issue market may be
raising capital for converting private capital into public capital; this is known as "going public."
The secondary market, also known as the aftermarket, is the financial market where
previously issuedsecurities and financial instruments such as stock, bonds, options,
and futures are bought and sold.
[edit]Profit sharing
Both casual and professional stock investors, through dividends and stock price increases that
may result in capital gains, will share in the wealth of profitable businesses.
[edit]Corporate governance
By having a wide and varied scope of owners, companies generally tend to improve on
their management standards and efficiency in order to satisfy the demands of these shareholders
and the more stringent rules for public corporations imposed by public stock exchanges and the
government. Consequently, it is alleged that public companies (companies that are owned by
shareholders who are members of the general public and trade shares on public exchanges) tend
to have better management records than privately held companies (those companies where
shares are not publicly traded, often owned by the company founders and/or their families and
heirs, or otherwise by a small group of investors).
Despite this claim, some well-documented cases are known where it is alleged that there has
been considerable slippage in corporate governance on the part of some public companies.
The dot-com bubble in the late 1990's, and the subprime mortgage crisis in 2007-08, are classical
examples of corporate mismanagement. Companies like Pets.com (2000), Enron
Corporation (2001), One.Tel (2001), Sunbeam(2001), Webvan (2001), Adelphia (2002), MCI
WorldCom (2002), Parmalat (2003), American International Group (2008), Bear
Stearns (2008),Lehman Brothers (2008), General Motors (2009) and Satyam Computer
Services (2009) were among the most widely scrutinized by the media.
However, when poor financial, ethical or managerial records are known by the stock investors,
the stock and the company tend to lose value. In the stock exchanges, shareholders of
underperforming firms are often penalized by significant share price decline, and they tend as
well to dismiss incompetent management teams.
MONEY MARKET
The money market is a component of the financial markets for assets involved in short-
term borrowing and lending with original maturities of one year or shorter time
frames.
In economics, a financial market is a mechanism that allows people to buy and sell (trade)
financialsecurities (such as stocks and bonds), commodities (such as precious metals or
agricultural goods), and other fungible items of value at low transaction costs and at prices that
reflect the efficient-market hypothesis.
Earnings per share (EPS)[26]
Payout ratio[26][27]
OR
P/E ratio
Dividend yield
Price/sales ratio
PEG ratio
According to dividend yield method or dividend price ratio method, “Cost of equity capital is
minimum rate which will be equal to the present value of future dividend per share with
current price of a share.
Cost of equity =
Dividend per equity share/ Market price or net proceed of per share
A company issues 1000 shares of Rs. 100 each at a premium of 10%. The company has been
paying 20% dividend to equity shareholders for the past five years and expects to maintain
the same in the future also. Compute the cost of equity capital. Will it make any difference if
the market price of equity share is Rs. 160?
Solution:
= 20/110 X 100
= 18.18%
Dividend yield plus growth in dividend method is based on the assumption that company is
growing and its shares market value is also increasing. In that situation, shareholders want
more than simple dividend, so company can provide some more profit according to growth.
So, we will add it in previous calculated cost of equity capital.
= 10/100-5 + 5% = 15.53%
If the current market price of equity share is Rs. 150, calculate the cost of existing
equity share capital.
According to this method, cost of equity capital is minimum rate which we have to earn on
market price of a share. Its formula is
A firm is considering an expenditure of Rs. 60 lakhs for expanding its operations. The relevant
information is as follows:
Compute the cost of existing equity share capital and of new equity capital assuming that new
shares will be issued at a price of Rs. 52 per share and the costs of new issue will be Rs. 2 per
share.
= Rs. 9
Ke = 9/60 X 100
Ke = 15%
One of major limitation of dividend yield method or earning yield method that both methods
are based on estimation of future dividend or earning. There are large numbers of factors
which are uncontrollable and uncertain. And if any financial risk will happen, we can not use it
in future planning or we also can not take any decision related to estimation of return on
investment. So, realised yield method is best method for calculating the cost of equity share
capital.
This method is based on actual earning earned on all amount of investment. After this, we try
to know, how much money is financed from equity share capital and reserve amount of past
profits and after this we calculate cost of equity share capital.
Cost of Pref. Share capital (Kp) = amount of preference dividend/ Preference share
capital
Kp = D/P
If we have obtained this preference share capital after some adjustments like premium or
discount or pay some cost of floatation, at that time, it is our duty to deduct discount
andcost of floatation or add premium in par value of pref. share capital.
In adjustment case cost of pref. share capital will change and we can calculate it with
following way:-
Kp = D/ NP
NP = Net proceed = Par value of Pref. share capital – discount – cost of floatation
There will no adjustment of tax rates because, dividend on pref. share capital is payable on
net profit after tax adjustment, so need not to do adjustment of tax for comparing it with cost
of debt or cost of equity share capital .
Some, time we issue redeemable preference shares whose amount is payable after some
time.
At the time of maturity, we need to calculate cost of pref. share capital with following
formula
D = Annual dividend
N= number of years
This formula is little different from cost of non redeemable pref. share capital because, we
have to add, the benefit which we have given to pref. share capital at the time of maturity.
Suppose, we have to pay Rs. 10, 00,000 but at the time of issue of pref. share, we had paid
Rs. 2 per issue of pref. share. So, net proceed is Rs. 9,80,000 but if this amount is payable
after 10 years at 10% premium, this will also benefit to pref. share capital and total cost of
pref. share capital will increase. Rate of dividend is 10%.
= 10.54%
If we compare it with simple cost of pref. share capital with following way
Kp = D/P X 100 = 100000 / 10, 00,000 X 100 = 10% it is same as dividend rate but Kpr is
more than Kp. So, Kpr will give you correct result.
Weighted Average Cost Of Capital - WACC
The WACC equation is the cost of each capital component multiplied by its proportional weight
and then summing:
Where:
Re = cost of equity
Rd = cost of debt
E = market value of the firm's equity
D = market value of the firm's debt
V=E+D
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tc = corporate tax rate
Businesses often discount cash flows at WACC to determine the Net Present Value (NPV) of a
project, using the formula:
In finance, the cost of equity is the minimum rate of return a firm must offer shareholders to
compensate for waiting for their returns, and for bearing some risk.
The cost of equity capital for a particular company is the rate of return on investment that is
required by the company's ordinary shareholders. The return consists both of dividend and capital
gains, e.g. increases in the share price. The returns are expected future returns, not historical
returns, and so the returns on equity can be expressed as the anticipated dividends on the shares
every year in perpetuity. The cost of equity is then the cost of capital which will equate the current
market price of the share with the discounted value of all future dividends in perpetuity.
The cost of equity reflects the opportunity cost of investment for individual shareholders. It will
vary from company to company because of the differences in the business risk and financial or
gearing risk of different companies.
However, there are also a variety of other ways to estimate the cost of equity. For example, using
the CAPM model, the cost of equity is the product of the Market Risk Premium and the
equity's beta plus the risk-free interest rate.
[edit]See also
Other Market R