The document discusses financial leverage and how it is calculated. Financial leverage measures the relationship between earnings before interest and taxes (EBIT) and earnings per share (EPS). It reflects how a change in EBIT impacts EPS due to the presence of fixed financial charges like interest and dividends. The degree of financial leverage (DFL) is calculated as the percentage change in EPS divided by the percentage change in EBIT. Financial leverage exists when there are fixed financial costs, and is a measure of how much debt a firm uses.
Leverages one of the most difficult to understand and interpret in financial management.. Here's a short explanation with calculation of financial and operating leverages..
Fm11 ch 15 corporate valuation, value based management, and corporate governanceNhu Tuyet Tran
This document discusses corporate valuation, value-based management, and corporate governance. It defines assets-in-place and nonoperating assets as the two types of assets a company owns. It provides formulas for calculating the value of operations using discounted cash flow analysis and outlines how to determine total corporate value, claims on value, and market value added. The document also discusses value-based management, the four value drivers, and how corporate governance mechanisms like anti-takeover provisions and board composition can impact manager entrenchment and shareholder value.
This document discusses theories related to corporate dividend decisions and their impact on firm value. It outlines two broad categories of theories: theories of irrelevance, which argue dividend decisions do not affect firm value, and theories of relevance, which argue they do. Key theories discussed include the residual approach, Modigliani-Miller approach, Walter's model, and Gordon's model. The document analyzes the assumptions and conclusions of each theory regarding how different dividend policies impact firm value under varying conditions.
The presentation slide is on stock valuation. We have tried to present the various techniques to stock valuation under which different methods are discussed with illustrations. Key concepts:
Zero Growth Model
Balance sheet Technique
Constant Growth Model
Two-stage growth Model
Feel Free to comment.
The document discusses time value of money concepts including compound interest, future value, present value, and annuities. It provides examples of calculating future and present values of single cash flows and annuities using time value of money formulas and tables. It also covers calculating future and present values of mixed cash flows, annual payments required to reach a future value, and steps for solving time value of money problems.
Investing in a single asset carries unique risks based on the variability and standard deviation of that asset's historical returns. Diversifying among multiple unrelated assets reduces overall portfolio risk, as poor performance of some assets may be offset by positive returns from others. While any single asset could fail, it is less likely that all assets in a portfolio would fail at the same time by experiencing losses. Therefore, diversification helps stabilize returns and lower risk compared to investing in only a single asset.
This chapter discusses the cost of capital, which includes the costs of the various components that make up a firm's capital structure: debt, preferred stock, and common equity. It also discusses the weighted average cost of capital (WACC), which is a weighted average of the costs of the various components used to finance the firm. The chapter provides methods for estimating the costs of each component as well as the weights to use in calculating the WACC. It also discusses adjusting the cost of capital for divisions within a firm to account for different risk levels.
This document provides an overview of time value of money concepts. It discusses that the value of money decreases over time, so money received today is worth more than the same amount in the future. There are four reasons for an individual's time preference for money: investment opportunities, risk, personal consumption preference, and inflation. The document then describes techniques for adjusting cash flows for time value, including compounding and discounting. It provides examples of simple and compound interest calculations. Finally, it discusses concepts such as present value, perpetuities, and effective interest rates.
Measurement of Risk and Calculation of Portfolio RiskDhrumil Shah
This document discusses measuring risk and calculating portfolio risk. It defines risk as the probability of loss and explains that higher investment means higher risk but also higher potential return. It then discusses measuring the risk of individual assets using variance and standard deviation calculated from the asset's probability distribution of returns. The document also explains how to calculate the expected return, variance and standard deviation of a portfolio by taking the weighted average of the individual assets. Diversifying a portfolio can reduce overall risk since the returns on different assets may not move in the same direction.
The document discusses Modigliani and Miller's approach to capital structure. It states that under their approach, in the absence of taxes, a firm's market value is not affected by its capital structure. It also discusses how when taxes are incorporated, the value of the firm increases and cost of capital decreases with the use of debt due to the deductibility of interest payments. The document provides an example comparing two companies, one with equal proportions of debt and equity and one with more equity than debt, to illustrate this point. It also presents the formulas used in Modigliani and Miller's approach.
As an Investment Advisor, you will have to play an important role in enabling your clients to reach their financial goals without the emotions of fear or greed playing havoc. It is essential to understand Behavioural Finance, especially Heuristics and Biases that creep into financial decision making.
Capital structure refers to how a corporation finances its assets through a combination of equity, debt, or securities. A firm's capital structure composition includes liabilities like debt and equity shares. Equity shares make shareholders owners but do not burden the company, while debt provides tax advantages but requires regular payments. An optimal capital structure considers advantages and disadvantages of different sources to maximize utilization of resources.
This document defines risk and return in investments. Return is the expected profit from an investment based on current information, while risk refers to the chance of losing some or all of the original investment. Generally, investments with higher risk like equity shares have higher expected returns around 10%, while lower risk debt instruments average 3-4% returns. However, equity shares also experience more volatile short-term returns. The relationship between risk and return is such that higher risk investments offer higher potential returns. Diversifying investments across a portfolio can help reduce overall risk.
The document discusses various methods for valuing different types of securities. It covers the valuation of debentures, preference shares, and equity shares. For debentures and preference shares, the valuation models discount future interest and principal cash flows to arrive at a present value. For equity shares, the dividend capitalization approach discounts expected future dividends, while the earnings capitalization approach discounts future earnings. Growth must be considered for shares but not for debentures or preference shares that offer fixed cash flows.
The document provides an overview of investment management, including defining it as handling financial assets to achieve investment objectives. It discusses the basics of investment management for both individual and institutional investors. The investment management process involves establishing goals and risk tolerance, creating an appropriate portfolio, and ongoing monitoring. Key steps include asset allocation, portfolio design and review, and regular performance reporting.
Dividend policy
What is Dividend?
What is dividend policy?
Theories of Dividend Policy
Relevant Theory
Walter’s Model
Gordon’s Model
Irrelevant Theory
M-M’s Approach
Traditional Approach
Referred to:
Prasanna Chandra
This chapter discusses risk and return, including:
- Risk and return of individual assets is measured using probability distributions and expected return and standard deviation.
- Portfolio risk is lower than holding individual assets due to diversification. Beta measures the sensitivity of an asset's return to market movements.
- The Security Market Line shows the expected return of an asset based on its beta and the risk-free rate. The Capital Asset Pricing Model suggests assets should be priced based on their systematic risk.
The document discusses company analysis and stock valuation. It provides guidance on analyzing a company's competitive strategies, growth potential, management quality, and financials to estimate intrinsic value. Key steps include conducting a SWOT analysis, comparing intrinsic value to market price, and monitoring assumptions to determine when to sell. The overall aim is to identify undervalued stocks by focusing on long-term prospects and downside protection.
This document discusses different types of leverage used in business. There are three main types: operating leverage, financial leverage, and combined leverage. Operating leverage measures how fixed costs affect operating profit with changes in sales. Financial leverage shows how interest expenses affect net income. Combined leverage considers both operating and financial leverage and their combined impact on earnings per share with sales changes. The degree of each type of leverage can be calculated to understand the risk involved at different levels.
SlideShare Rockstar! How to become a SlideShare "Keynote Author"Paul Brown
"Keynote Author" is a designation given by SlideShare to select users who are recognized as "top content creators." What does this program entail and how can you achieve this status?
Some samples of my work: http://paulgordonbrown.com/presentations/
A Day in the Life: Leveraging Social in Building Relationships in Financial S...LinkedIn Sales Solutions
The document summarizes a presentation about leveraging social media, specifically LinkedIn, in building relationships in the financial services industry. It discusses how account executives and sales development representatives can partner to prioritize accounts and prospects, build pipelines, and increase win rates. Tips are provided on engaging prospects through LinkedIn, maintaining relationships, and leveraging features like Sales Navigator to be more efficient and close more business. Social sellers are shown to create more opportunities, be more likely to achieve quotas, and outsell peers who do not use social media.
This document discusses the concept of leverage and its types - operating leverage and financial leverage. It explains how operating leverage is determined by the fixed costs in a company's operations and how it magnifies the effect of changes in sales on operating profits. Financial leverage is determined by the fixed financial costs and how it magnifies the effect of changes in earnings on shareholder returns. The document also discusses factors influencing a company's capital structure and various capital structure theories.
How can a business strategically use all the social tools for business purposes? It takes a sound strategy followed by execution by experienced resources that understand the art and science of social media.
This document provides an overview of social selling on LinkedIn and recommendations for using LinkedIn effectively. It discusses establishing a professional brand by optimizing your LinkedIn profile, finding the right people by leveraging your network and prioritizing leads, and engaging with insights by appealing to both logical and emotional sides of prospects' brains. The key takeaways are to create a professional brand, find quality leads within your network, and engage authentically with prospects on LinkedIn to strengthen relationships and drive sales.
- Leverage provides the framework for financing decisions and can be defined as using an asset or source of funds that requires paying a fixed cost or return.
- Operating leverage is associated with fixed operating costs and how much they magnify changes in sales on operating profits. Financial leverage measures how debt impacts changes in earnings per share.
- Degree of operating leverage (DOL) and degree of financial leverage (DFL) are used to measure the sensitivity of profits and earnings to changes in sales and operating profits respectively. Higher leverage means greater risk but also greater potential returns.
Leverage refers to the use of debt to finance assets or operations. It allows for greater potential returns but also greater potential losses if the investment becomes worthless and loan obligations must still be repaid. The degree of financial leverage is measured by the percentage change in earnings per share from a given percentage change in earnings before interest and taxes. Leverage can be measured using ratios like debt-to-equity and debt-to-capital. Cash flow information is important for a company's ability to meet fixed obligations but does not indicate future risk on its own.
This document defines and explains various types of leverage including accounting, notional, economic, operating, and financial leverage. It also discusses degrees of operating leverage, financial leverage, and total leverage. Leverage involves using assets, equity, debt, or derivatives to multiply gains and losses. It allows firms to magnify returns but also increases risk. The document provides examples of calculating break-even points in units and sales. Operating leverage reflects the impact of revenue changes on profits while financial leverage depends on a firm's capital structure.
10 Ways to Win at SlideShare SEO & Presentation OptimizationOneupweb
Thank you, SlideShare, for teaching us that PowerPoint presentations don't have to be a total bore. But in order to tap SlideShare's 60 million global users, you must optimize. Here are 10 quick tips to make your next presentation highly engaging, shareable and well worth the effort.
For more content marketing tips: http://www.oneupweb.com/blog/
No need to wonder how the best on SlideShare do it. The Masters of SlideShare provides storytelling, design, customization and promotion tips from 13 experts of the form. Learn what it takes to master this type of content marketing yourself.
SlideShare now has a player specifically designed for infographics. Upload your infographics now and see them take off! Need advice on creating infographics? This presentation includes tips for producing stand-out infographics. Read more about the new SlideShare infographics player here: http://wp.me/p24NNG-2ay
This infographic was designed by Column Five: http://columnfivemedia.com/
This document provides tips to avoid common mistakes in PowerPoint presentation design. It identifies the top 5 mistakes as including putting too much information on slides, not using enough visuals, using poor quality or unreadable visuals, having messy slides with poor spacing and alignment, and not properly preparing and practicing the presentation. The document encourages presenters to use fewer words per slide, high quality images and charts, consistent formatting, and to spend significant time crafting an engaging narrative and rehearsing their presentation. It emphasizes that an attractive design is not as important as being an effective storyteller.
How to Make Awesome SlideShares: Tips & TricksSlideShare
Turbocharge your online presence with SlideShare. We provide the best tips and tricks for succeeding on SlideShare. Get ideas for what to upload, tips for designing your deck and more.
This document provides tips for getting more engagement from content published on SlideShare. It recommends beginning with a clear content marketing strategy that identifies target audiences. Content should be optimized for SlideShare by using compelling visuals, headlines, and calls to action. Analytics and search engine optimization techniques can help increase views and shares. SlideShare features like lead generation and access settings help maximize results.
This document discusses different types of leverage used in financial analysis:
1. Operating leverage measures how fixed costs magnify changes in sales on earnings before interest and taxes (EBIT). It is calculated as the percentage change in EBIT divided by the percentage change in sales.
2. Financial leverage measures how fixed financial charges magnify the effect of changes in EBIT on earnings per share (EPS). It is calculated as the percentage change in EPS divided by the percentage change in EBIT.
3. Combined leverage measures the combined effect of operating and financial leverage on EPS. It is calculated as the percentage change in EPS divided by the percentage change in sales.
The document provides examples and explanations of how to calculate
This document discusses various financial ratios used to analyze company performance, including liquidity, asset management, debt, profitability, and market value ratios. It explains how ratios can be used to compare companies and assess financial health. Examples are provided to illustrate how specific ratios like debt-to-asset, times interest earned, and return on equity are calculated and interpreted.
This document summarizes a lecture on leverage given by Dr. Mahmoud Otaify. It defines leverage and differentiates between operating and financial leverage. It provides examples to calculate the degree of operating leverage and degree of financial leverage. The document discusses how leverage increases both business risk and financial risk for a company. It also examines how leverage impacts earnings per share and the relationship between earnings before interest and taxes and earnings per share under different capital structures.
The document discusses various aspects of financial and operating leverage including:
1) The definitions of capital structure, financial structure, and measures of financial leverage like debt ratio and interest coverage ratio.
2) How financial leverage is used to earn higher returns on fixed-charge funds and magnify shareholders' returns.
3) The relationship between financial leverage, operating leverage, and their combined effect on earnings per share with changes in sales.
4) Examples are provided to calculate the degrees of operating, financial, and combined leverage.
1. Leverage reflects the responsiveness of one financial variable to changes in another variable. It is measured by the percentage change in the dependent variable divided by the percentage change in the independent variable.
2. Leverage refers to using fixed costs to magnify returns. There are operating fixed costs like rent and financial fixed costs like interest. Operating, financial, and total leverage can be measured.
3. Operating leverage measures the relationship between sales and earnings before interest and taxes (EBIT). It indicates how much EBIT changes with sales. Firms with high operating leverage face more risk from changes in sales.
Effects of operating and financial Leverages sangamdesai
1) Financial leverage refers to the use of fixed-cost sources of funds like debt and preference shares along with equity in a company's capital structure.
2) Financial leverage is intended to earn a higher return on fixed-cost funds than their cost, which increases or decreases returns to equity holders.
3) Measures of financial leverage include debt ratio, debt-equity ratio, and interest coverage ratio. These measures can use book or market values.
This document discusses different types of leverage used in corporate finance including operating, financial, and combined leverage. It provides definitions and formulas for calculating each type. Examples are given to demonstrate how to calculate the leverages for companies based on information provided about sales, costs, debt, and other financial details. The document suggests that companies with higher leverage may have greater financial risk but also greater potential profits if sales increase as projected.
This document provides an overview of capital structure decision-making and various approaches to determining the relationship between capital structure and firm value. It discusses the net income approach, which states that capital structure is relevant to firm value, as changing the debt-equity ratio will alter the overall cost of capital and valuation. The net income approach assumes no taxes, cheaper debt than equity, and that debt use does not impact investor risk perception. The document also mentions the traditional and Modigliani-Miller approaches regarding capital structure irrelevance versus relevance to firm value.
Capital Structure Decisions-B.V.RaghunandanSVS College
This document discusses capital structure and dividend policies. It defines capital structure as the permanent financing of a firm through long-term debt, preferred stock, and equity. It lists factors to consider when planning capital structure and describes the features, benefits, and drawbacks of debt and equity. It also discusses leverage, types of leverage including operating, financial, and combined leverage. Finally, it covers different dividend policies like stable dividend policy and stable dividend payout policy.
Financial leverage refers to raising funds through long-term debt and preference shares that incur fixed financing charges. Degree of financial leverage is measured as the percentage change in EPS divided by the percentage change in EBIT. It is also calculated as the ratio of EBIT to earnings before tax.
Operating leverage refers to the use of fixed operating costs in a firm's operations. It is calculated as the ratio of contribution to EBIT. Combined leverage is the product of operating leverage and financial leverage.
EBIT-EPS analysis assesses the impact of different financial proposals on shareholder value by calculating EPS under each proposal. The proposal with the highest EPS is selected. Indifference point is the level of EBIT where EPS is
Leverage refers to a firm's use of fixed costs, whether operating costs or financial costs like interest, to magnify the effect of changes in sales or operating profits on profits. There are three main types of leverage:
1) Operating leverage is the use of fixed operating costs, which do not vary with sales. Higher operating leverage means profits are more sensitive to changes in sales.
2) Financial leverage is the use of fixed financing charges like interest on debt. It magnifies the effect of changes in operating profits on net profits.
3) Combined leverage considers the interaction of operating and financial leverage and their combined effect on profits and earnings per share. Firms seek an optimal level of leverage to maximize
The document discusses various aspects of capital structure including:
- Defining capital structure and the components that make up a company's financial structure
- Approaches to determine the appropriate capital structure such as EBIT-EPS, valuation, and cash flow approaches
- The concept of optimal capital structure which maximizes share price value and minimizes cost of capital
- Different forms of capital structure such as equity only, combinations of equity and debt, etc.
- The concepts of leverage including operating, financial, and combined leverage and how they impact risk and returns
This PPT contains the full detail of topic leverage in financial management
it covers following topics :-
Meaning of Leverage
Types of Leverage
Operating Leverage
Financial Leverage
Difference between Operating & Financial Leverage
Combined Leverage
Illustrations
Exercise
SAPM Growth Rates MBA Notes and Materialomkarkothule
The document discusses various methods for estimating company growth rates, including historical, analyst, and fundamental approaches. Historical growth can be calculated using arithmetic or geometric averages, and must account for factors like negative earnings, scale changes, and base year selection. Analyst estimates have limitations like sector focus and relationship bias. Fundamental growth estimates growth based on a company's reinvestment rate and return on capital. The document provides examples of calculating growth rates using various metrics and accounting for changing returns on capital over time.
Lecture 2. introduction to financial managementKritika Jain
The document discusses financial management topics taught in an MBA program at Amity Business School. It defines the financial environment and system, including financial markets, instruments, intermediaries, and the regulatory framework. It then compares the objectives of profit maximization versus wealth maximization. Profit maximization is criticized for being vague, ignoring the time value of money and risk. Wealth maximization, also called value or net present worth maximization, is presented as a better objective as it focuses on maximizing shareholder value through appropriate financial decisions.
This document discusses operating and financial leverage. It defines operating leverage as a firm's ability to magnify changes in sales through the use of fixed operating costs. Financial leverage refers to the relationship between a firm's earnings before interest and taxes (EBIT) and earnings available to shareholders. The document provides examples to illustrate how both operating and financial leverage can amplify the percentage changes in profits resulting from changes in sales or EBIT. It also introduces formulas to calculate the degree of operating leverage (DOL) and degree of financial leverage (DFL).
The document discusses capital structure, which refers to the mix of long-term financing sources like equity shares, preference shares, debentures, and retained earnings that a company uses. It provides examples of different capital structure patterns that companies can use, including all equity, equity with preference shares, and combinations including debt. The optimal capital structure balances the costs and benefits of debt versus equity to maximize shareholder value. Formulas for calculating earnings per share under different capital structures and the indifference point between structures are also presented.
The document defines and discusses different types of leverage:
- Operating leverage refers to using fixed operating costs to magnify the effects of sales changes on profits. It is measured as the percentage change in profits from a percentage change in sales.
- Financial leverage uses fixed financing costs to magnify the effects of changes in operating profits on earnings. It is measured as the percentage change in taxable income from a percentage change in operating profits.
- Combined leverage represents the combined effects of operating and financial leverage in magnifying the effects of sales changes on earnings per share. It is calculated as the product of operating and financial leverage.
This document provides an introduction to corporate finance concepts including:
- The roles and responsibilities of financial managers in making capital budgeting, capital structure, and working capital decisions.
- The three major forms of business organization: sole proprietorship, partnership, and corporation.
- The goal of financial management and agency problems that can arise between owners and managers.
- Basic definitions related to present and future value, interest rates, and discount rates.
- Formulas for calculating future and present values of single and multiple cash flows.
Lecture 12 q uestion on leverage analysisKritika Jain
This document contains 22 questions from Amity Business School related to financial leverage, operating leverage, and combined leverage. Questions ask students to calculate various leverage ratios from income statements and balance sheets of companies. They are also asked to interpret the significance of leverage ratios and how they impact decision making. Students must calculate earnings per share, break-even point, changes in EPS from changes in sales or costs.
The document contains questions related to time value of money concepts such as compound interest, present and future value of investments, annuities, and loans. It asks the reader to calculate future and present values under different interest rate scenarios, determine investment amounts needed to achieve future targets, and analyze loan and investment schemes. It also includes a mini case about determining retirement planning numbers.
The document discusses discounting techniques used to determine the present value of future cash flows. It provides formulas to calculate the present value of a single cash flow, an annuity, and an annuity due. Examples are given of calculating the present value of Rs. 50,000 received in 15 years, an ordinary annuity of Rs. 1,000 for 3 years, and an annuity due of Rs. 1,000 for 3 years. The document also provides an example of choosing between a lump sum payment and annual pension based on present value calculations.
The document discusses compounding techniques and calculating future values. It defines compound interest as interest earned on the initial principal sum becoming part of the principal. It then provides formulas and examples for calculating the future value of a single cash flow (lump sum) and the future value of a series of cash flows (annuity), including ordinary annuities where payments occur at the end of each period and annuities due where payments occur at the beginning of each period. Non-annual compounding and sinking funds are also briefly discussed.
This document discusses the time value of money concept from an Amity Business School financial management class. It explains that money has greater value when received today compared to in the future due to uncertainties and reinvestment opportunities. It also discusses how timelines can be used to visualize cash flows occurring at different points in time and how compounding and discounting techniques allow comparison of cash flows across time periods by converting them to a common point in time.
Lecture 1. introduction to financial managementKritika Jain
The document provides an overview of financial management. It defines financial management as planning and controlling a firm's financial resources, including procuring funds in an economic manner and employing funds optimally to maximize returns. It then outlines the evolution of financial management from the traditional to modern phase. Key aspects of financial management are investment, financing, and dividend decisions. Investment decisions involve selecting profitable investment avenues. Financing decisions relate to determining the optimal capital structure and sources of finance. Dividend decisions balance paying dividends to shareholders versus retaining profits for reinvestment.
Here are my analyses of the expected dividend payout ratios for each company described:
- A company with a large proportion of inside ownership, all of whom are high income individual: Medium/high payout ratio. High income insiders prefer current dividends.
- A growth company with an abundance of good investment opportunities: Low payout ratio. Growth companies retain more earnings to fund good investment opportunities.
- A company experiencing ordinary growth that has liquidity and much unused borrowing capacity: Medium/high payout ratio. With liquidity and borrowing capacity, it has flexibility to pay dividends while still investing for growth.
- A company that experiences an unexpected drop in earnings from a trend: Low payout ratio. It
This document discusses two theories on the impact of dividend declaration on firm valuation:
1) The irrelevance theory argues that dividend decisions do not impact shareholder wealth or market price since earnings can be retained or distributed as dividends through financing decisions.
2) The Modigliani-Miller approach also claims dividend policy does not affect market share price or firm value, which is determined by earnings capacity. Dividing earnings between retention and dividends does not change the firm's overall value.
The document provides an example to prove that under the MM hypothesis, paying a dividend of Rs. 6 per share for a firm with 5000 shares and expected earnings of Rs. 50,000 investing Rs. 100,000 does
The document discusses inventory management techniques. It describes the purposes of holding inventory as transaction motive, precaution motive, and speculative motive. It also discusses the risks and costs of holding inventory. The objectives of inventory management are to ensure continuous supply and avoid overstocking/understocking while maintaining optimal investment levels. Techniques discussed include determining minimum, maximum, reorder, and danger stock levels. It also discusses economic order quantity and receivables management concepts.
Loop Ltd requires net working capital to produce 100 units. It needs raw materials for 8 weeks of stock, work in progress for 6 weeks, and finished goods stock for 6 weeks. Accounts receivable are 2 weeks and accounts payable are 4 weeks. Estimated net working capital is the total working capital requirement plus a 20% contingency amount.
The document discusses various capital budgeting techniques used to evaluate investment projects, including payback period and net present value (NPV). It provides examples of how to calculate payback period for projects with both uniform and non-uniform cash flows. It also discusses the limitations of payback period as a capital budgeting method. The document then introduces NPV as a discounted cash flow technique and provides the formula for calculating NPV. It states that projects with positive NPV should be accepted while projects with negative NPV should be rejected.
The document discusses the steps involved in capital budgeting decisions and cash flow calculations for capital projects. It provides an example calculation for a company considering investing Rs. 100,000 in new machinery. The summary is:
1) Capital budgeting involves estimating cash flows, cost of capital, and selecting a decision criterion.
2) For a new machinery investment, the initial cash outflow is Rs. 120,000 and annual cash flows are calculated over 5 years based on revenues, expenses, depreciation, and taxes.
3) The example calculates the annual and terminal cash flows after tax for the machinery project.
For taxation purposes in India, depreciation is charged on a "block of assets" which is a group of assets in the same class (buildings, furniture, plant, etc.) that have the same prescribed depreciation rate, rather than on individual assets. There are 12 such blocks for 4 classes of assets specified in the Income Tax Act. Capital gains arise when the sale proceeds of a block of assets exceeds the written down value of that block.
The document outlines the capital budgeting process at Amity Business School, which includes generating investment ideas, estimating cash flows, evaluating cash flows, selecting projects, and monitoring execution. It emphasizes that capital budgeting should be based on cash flows rather than accrual accounting because cash flows are more certain amounts and avoid different interpretations. It provides principles for estimating cash flows, such as only including cash inflows and outflows, ignoring non-cash items like depreciation, calculating after-tax cash flows, and ignoring sunk costs already incurred.
- The document discusses capital budgeting and cash flow analysis for a proposed machinery investment of Rs. 1,20,000 with a 5 year life.
- It calculates the annual cash flows after tax over the 5 years, which range from Rs. 24,100 to Rs. 38,800, factoring in revenue, expenses, depreciation and taxes.
- The terminal cash flow at the end of 5 years is Rs. 48,800, which includes the final annual cash flow plus the expected scrap value of Rs. 10,000 for the machine.
The document discusses several theories of capital structure:
1) The traditional approach finds that a firm's value and cost of capital initially decrease with more debt but then increase after a certain point as debt rises.
2) Modigliani and Miller's approach suggests capital structure does not affect firm value in the absence of taxes.
3) Pecking order theory proposes firms prefer internal funds, then debt, and finally equity when raising capital, due to costs and information asymmetries.
4) Static trade-off theory finds an optimal capital structure where the marginal benefit of debt's tax shield equals the marginal costs of bankruptcy.
1. The net income approach suggests that a firm can minimize its weighted average cost of capital and maximize shareholder value by using as much debt financing as possible, as long as the cost of debt is less than the cost of equity and risk is unchanged.
2. The net operating income approach, proposed by Durand, argues that a company's total market value and overall cost of capital remain constant regardless of its debt-equity ratio, so every capital structure is optimal.
3. The document provides examples to illustrate how to calculate a firm's value and capitalization rates under each approach, assuming no corporate taxes.
This document discusses capital structure and the relationship between financing and investment decisions. It provides the following key points:
1. Financing decisions involve raising funds to meet investment needs, with most investments funded through borrowed money. This requires determining available funds and costs of financing.
2. Capital structure refers to the mix of debt and equity used to finance a company's assets and operations. It shows the proportion of liabilities (debt) to equity.
3. Financing and investment decisions are correlated - financing decisions determine the funds available for investments, while investments determine the assets and activities financed. The capital structure and its costs significantly impact both decisions.
The document contains 5 questions regarding calculating the weighted average cost of capital (WACC) for various companies based on their capital structure, cost of different sources of capital, tax rates, and other financial information provided. It asks the reader to calculate WACC based on book values or market values for the equity shares, retained earnings, preference shares, debentures, and debt. Additional information may include the gearing ratio, expected dividend growth rates, changes to the capital structure through new financing, and how this would impact the equity share price and WACC.
This document contains a series of questions related to calculating the cost of equity share capital using different methods. It begins with an introduction to Amity Business School and its module on the cost of capital. It then provides background on four main methods for calculating cost of equity - dividend yield, dividend growth, earnings yield, and CAPM. The remainder of the document consists of 11 sample questions asking to calculate cost of equity using one or more of these methods based on financial information provided, such as dividend rates, growth rates, share prices, betas, and risk-free rates.
Benchmarking Sustainability: Neurosciences and AI Tech Research in Macau - Ke...Alvaro Barbosa
In this talk we will review recent research work carried out at the University of Saint Joseph and its partners in Macao. The focus of this research is in application of Artificial Intelligence and neuro sensing technology in the development of new ways to engage with brands and consumers from a business and design perspective. In addition we will review how these technologies impact resilience and how the University benchmarks these results against global standards in Sustainable Development.
Demonstration module in Odoo 17 - Odoo 17 SlidesCeline George
In Odoo, a module represents a unit of functionality that can be added to the Odoo system to extend its features or customize its behavior. Each module typically consists of various components, such as models, views, controllers, security rules, data files, and more. Lets dive into the structure of a module in Odoo 17
PRESS RELEASE - UNIVERSITY OF GHANA, JULY 16, 2024.pdfnservice241
The University of Ghana has launched a new vision and strategic plan, which will focus on transforming lives and societies through unparalleled scholarship, innovation, and result-oriented discoveries.
Open Source and AI - ByWater Closing Keynote Presentation.pdfJessica Zairo
ByWater Solutions, a leader in open-source library software, will discuss the future of open-source AI Models and Retrieval-Augmented Generation (RAGs). Discover how these cutting-edge technologies can transform information access and management in special libraries. Dive into the open-source world, where transparency and collaboration drive innovation, and learn how these can enhance the precision and efficiency of information retrieval.
This session will highlight practical applications and showcase how open-source solutions can empower your library's growth.
How to Make a Field Storable in Odoo 17 - Odoo SlidesCeline George
Let’s discuss about how to make a field in Odoo model as a storable. For that, a module for College management has been created in which there is a model to store the the Student details.
2. Amity Business School
Financial Leverage
•The Financial Leverage measures the
relationship between the EBIT and the EPS.
•It reflects the effect of a change in EBIT on the
level of EPS.
• It results from the presence of fixed financial
charges (such as interest on debt and dividend
on preference shares).
3. Amity Business School
Sales Revenues (S) EBIT
- Variable Cost (V) - Interest
Contribution (PBT) Profit Before Tax
- Fixed Cost (F) - Tax
EBIT (PAT) Profit After Tax
- Preference Dividend
Earnings available for equity
shareholders
EPS = Earnings available for
equity shareholders
No. of Shares
4. Amity Business School
EBIT%Δ
PSE%Δ
DFL =
Degree of Financial Leverage (DFL)
EPS
•The degree of financial leverage (DFL) can be
calculated as:
eentVariablinIndepend
tVariableinDependen
∆
∆
%
%
=
5. Amity Business School
•Financial leverage is related to the financing activities of a
firm.
•Since such financial expenses do not vary with the operating
profits, financial leverage is concerned with the effect of
changes in EBIT on the earnings available to equity-holders.
•It is defined as the ability of a firm to use fixed financial
charges to magnify the effect of changes in EBIT on the
earnings per share (EPS).
6. Amity Business School
Therefore Financial leverage can be written as-
EBIT
Financial Leverage =
EBT
EBT = EBIT- Interest
EBT is also called PBT
7. Amity Business SchoolTip
Whenever, there is a change in the “level of activity” and
Financial Leverage is to be found out, then use the
formula-
But, whenever Financial Leverage is to be found out for
“status-quo” or for the “current level of activity” then use
the formula
EBIT%Δ
PSE%Δ
DFL =
EPS
EBIT
Financial Leverage =
EBT – (Preference Dividend)
(1-tax rate)
8. Amity Business School
Calculate Financial Leverage from the following data-
Year 1 Base Year Year 3
EBIT Rs 30,000 Rs 50,000 Rs 70,000
Number of shares 10,000 10,000 10,000
Tax Rate 35%
9. Amity Business School
Year 1 Base Year 3
– 40% +40%
EBIT Rs 30,000 Rs 50,000 Rs 70,000
Less: Taxes (0.35) 10,500 17,500 24,500
Earnings available for equity-
holders
19,500 32,500 45,500
Number of shares 10,000 10,000 10,000
EPS 1.95 3.25 4.55
– 40% +40%
10. Amity Business School
Degree of financial leverage (DFL): Applying-
(i) From Base year to year 3 = (+40% / + 40%) = 1
(ii) From Base year to year 1 = (-40% / -40%) = 1
Thus, the quotient is 1. Its implication is that 1 per cent change in EBIT will
result in 1 per cent change in EPS, that is, proportionate. There is,
therefore, no magnification in the EPS. There is no Financial Leverage
EBIT%Δ
PSE%Δ
DFL =
EPS
11. Amity Business School
•Financial leverage exists only when there are fixed
Financial costs (e.g. Interest on Debentures,
Preference Dividend) .
•If there are no fixed Financial costs, there will be no
Financial leverage.
12. Amity Business School
e.g.…
The financial manager of the Hindustan Chemicals Ltd expects that its
earnings before interest and taxes (EBIT) in the current year would amount
to Rs 10,000.
The firm has 5 per cent Bonds aggregating Rs 40,000, while the 10 per
cent Preference Shares amount to Rs 20,000.
What would be the earnings per share (EPS)?
The EBIT are as follows-
Year 1 Rs 10,000,
Year 2 Rs. 14,000 ;
How would the EPS be affected? Calculate Financial Leverage.
The firm can be assumed to be in the 35 per cent tax bracket.
The number of outstanding ordinary shares is 1,000.
13. Amity Business School
Year 1 Year 2
(% Change in EBIT) (Base Year) +40%
EBIT
Less: Interest on bonds
Earnings before taxes (EBT)
Less: Taxes (35%)
Earning after taxes (EAT)
Less: Preference dividend
Earnings available for ordinary shareholders
Earnings per share (EPS)
(% Change in EPS)
Rs 10,000
(2,000)
8,000
(2,800)
5,200
(2,000)
3,200
3.2
Rs 14,000
(2,000)
12,000
(4,200)
7,800
(2,000)
5,800
5.8
(Base Year) +81.25%
15. Amity Business School
•A 40% increase in EBIT (from Rs 10,000 to Rs 14,000)
results in 81.25 % increase in EPS (from Rs 3.2 to Rs 5.8).
•Thus, a 40% increase in the firm’s EBIT results in a more
than proportional increase in the firm’s EPS.
Interpretation
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Financial Leverage is a measure of the amount of debt used by a firm
Degree of Financial Leverage (DFL) = %age in EPS / %age in
EBIT
17. Amity Business School
Leverage Means Risk
• Leverage is a double-edged sword
• It magnifies profits as well as losses
• An aggressive or highly leveraged firm has a
relatively high break-even point (and high fixed
costs)
• A conservative or non-leveraged firm has a relatively
low break-even point (and low fixed costs)
18. Amity Business School
•
Sales (total revenue) (80,000 units @ $2) $160,000
— Fixed costs 60,000
— Variable costs ($0.80 per unit) 64,000
Operating income $ 36,000
Earnings before interest and taxes $ 36,000
— Interest 12,000
Earnings before taxes 24,000
— Taxes 12,000
Earnings after taxes $ 12,000
Shares 8,000
Earnings per share $1.50
Operating
leverage
Financial
leverage
19. Amity Business School
Significance
• The term leverage refers to a relationship between
two interrelated variables.
• In financial analysis, the leverage reflects the
responsiveness or influence of one financial variable
over some other financial variable.
• It quantifies the relative changes in profit due to
change in the sales. It depicts the change in fixed
costs incurred to sell the goods.
20. Amity Business School
• It helps the management in controlling operating costs
or varying the profit with an element of risk.
• It also helps in forecasting.
• It helps in understanding the relationship between any
two variables.
• However, the two variables for which the relationship
is to be established should be interrelated, otherwise,
the leverage study may not have any useful purpose to
serve.
21. Amity Business School
Master Table to Calculate the Leverage
Sales
Less: Variable Cost
Contribution
Less: Fixed Cost
Operating Profit or EBIT
Less: Interest
Earning before Tax (EBT)
Less: Tax
Earning after Tax
Less: Preference Dividend
Earning Available to Equity Shareholder
22. Amity Business School
Difference between Operating & Financial Leverage
Operating Leverage Financial Leverage
Operating Leverage is related to the
investment activities (capital expenditure
decision)
Financial leverage is more concerned
with financial matters. (Capital structure
or Debt & equity mix)
The Fluctuation in the EBIT can be
predicted with the help of operating
leverage.
The change of EPS due to Debt equity
mix is predicted by financial leverage.
Financial Manager Uses the operating
leverage to identify the items of assets
side of Balance Sheet.
The use of financial leverage is to make
decision in the liability side of the
Balance sheet.
Operating leverage is used to predict
Business risk.
Financial leverage is used to analyses
the financial risk.