Month: February 2021

Two long-term securities that are available to a company for raising capital are shares and debentures. Shares include ordinary shares and preference shares.* Ordinary shares provide ownership rights to investors. Debentures or bonds provide loan capital to the company, and Read More …

Most financial decisions, such as the purchase of assets or procurement of funds, affect the firm’s cash flows in different time periods. For example, if a fixed asset is purchased, it will require an immediate cash outlay and will generate Read More …

Assets can be real or financial. Securities, like shares and bonds or debentures are called financial assets, while physical assets, like plant and machinery, are called real assets. The concepts of return and risk, as the determinants of value, are Read More …

Risk and return are most important concepts in finance. In fact, they are the foundation of the modern finance theory. What is risk? How is it measured? What is return? How is it measured? Other related questions are: how are Read More …

INTRODUCTION TO PORTFOLIO THEORY A portfolio is a bundle or a combination of individual assets or securities. Portfolio theory provides a normative approach to investors to make decisions to invest their wealth in assets or securities under risk.1 It is Read More …

INTRODUCTION Let us summarize the essence of the concept of risk which we have discussed in Chapter 6. The risk of a portfolio of securities is measured by portfolio variance or standard deviation. The variance of a portfolio is the Read More …

INTRODUCTION The opportunity cost of capital (or simply, the cost of capital) for a project is the discount rate for calculating the present value of cash flows. The project’s cost of capital is the minimum required rate of return on Read More …

INTRODUCTION An efficient allocation of capital is the most important finance function in the modern times. It involves decisions to commit the firm’s funds to the long-term assets. Capital budgeting or investment decisions are of considerable importance to the firm, Read More …

INTRODUCTION The important message of the preceding chapter is that sound investment decisions should be based on the net present value (NPV) rule. The first difficult problem to be resolved in applying the NPV rule in practice is: What should Read More …

INTRODUCTION In discussing the capital budgeting techniques, we have so far assumed that the proposed investment projects do not involve any risk. This assumption was made simply to facilitate the understanding of the capital budgeting techniques. In real-world situation, however, Read More …