What is Cost of Equity? – Meaning, Concept and Formula
February 12, 2025
There is no doubt about the fact that the Product as a Service (PaaS) model is being adopted by companies on a large scale. This is because of the various advantages that the model has to offer. These advantages have already been discussed in the previous article. However, just looking at the advantages provides a […]
The commercial banking system has undergone a high deal of innovation in the past few years. A lot of new commercial lending products have been introduced in order to help business manage their finances better. A merchant cash advance is an example of one such innovative credit product introduced by the banks. In this article, […]
Fixed income securities are important to investors’ portfolios since they provide regular income in the form of coupon payments. However, there are many different types of bonds available in the market which offer different types of coupon payments. It is important for investors to realize these different types of coupon payments since they can have […]
Oceans account for over 70% of the surface area of the earth. This makes them important for life as well as for commerce. More than 90% of the international cargo around the world passes through water. Also, millions of people depend upon the ocean for their livelihood. Tourism and fishing and many other such occupations […]
In the past article we have seen how Discounted Cash Flow (DCF) is the most appropriate method of stock valuation because it is rational and objective. Now, it is time we have a look at the details of this model. Present Value of Expected Future Cash Flows The basic of this model seems to be […]
Corporate finance is based on two fundamental rules. All tools and techniques of corporate finance are mere ways and means of implementing these rules. These rules can be found at the beginning of any and every corporate finance text book. One of these rules relates to the concept of return while the other relates to the concept of risk. We have described both these rules in this article. They are as follows:
The fundamental rule of corporate finance is that the timing of cash flows is of paramount importance. Also, we want the timing of the cash flows to be as soon as possible. The sooner we get the cash, the better it is for our company. Every dollar that the company has in cash today is better than the same dollar in cash tomorrow because of the following reasons:
Corporate finance involves exchanging between present and future streams of cash flows. Companies may come across different projects which offer different future cash flows. However, it is important to realize that all cash flows are not equally likely to materialize in the future. Some cash flows may be almost certain like investing in treasury bonds while others may be highly uncertain like projected returns from stock market investments. Hence, the second rule states that the company must adjust each of these cash flows for their risk before making any comparisons and selections. The following factors must be considered:
The bottom line is that before making a choice, all projects have to be made comparable. This is done by adjusting for cash flow that will be received in different time periods as well as adjusting for the different amounts of risks that are involved in different projects.
Your email address will not be published. Required fields are marked *