The document discusses several financial concepts:
1. It defines average tax rate and effective tax rate, explaining that average tax rate is total taxes paid divided by taxable income while effective tax rate is the percentage of annual income owed to the IRS.
2. It describes the key differences between preferred stock and common stock, noting that preferred stockholders have no voting rights while common stock represents ownership and voting rights.
3. It provides definitions and examples of sunk costs, acquisitions, and mergers in business, explaining their roles in financial decisions and company combinations.
The document discusses several financial concepts:
1. It defines average tax rate and effective tax rate, explaining that average tax rate is total taxes paid divided by taxable income while effective tax rate is the percentage of annual income owed to the IRS.
2. It describes the key differences between preferred stock and common stock, noting that preferred stockholders have no voting rights while common stock represents ownership and voting rights.
3. It provides definitions and examples of sunk costs, acquisitions, and mergers in business, explaining their roles in financial decisions and company combinations.
The document discusses several financial concepts:
1. It defines average tax rate and effective tax rate, explaining that average tax rate is total taxes paid divided by taxable income while effective tax rate is the percentage of annual income owed to the IRS.
2. It describes the key differences between preferred stock and common stock, noting that preferred stockholders have no voting rights while common stock represents ownership and voting rights.
3. It provides definitions and examples of sunk costs, acquisitions, and mergers in business, explaining their roles in financial decisions and company combinations.
The document discusses several financial concepts:
1. It defines average tax rate and effective tax rate, explaining that average tax rate is total taxes paid divided by taxable income while effective tax rate is the percentage of annual income owed to the IRS.
2. It describes the key differences between preferred stock and common stock, noting that preferred stockholders have no voting rights while common stock represents ownership and voting rights.
3. It provides definitions and examples of sunk costs, acquisitions, and mergers in business, explaining their roles in financial decisions and company combinations.
Your average tax rate is the total tax you pay divided by your taxable income. Effec�ve tax rate = Tax/ Total taxable income So if your taxable income is $50,000 and you paid a total of $10,000 in taxes, your average tax rate is 20%. What is effec�ve tax rate? Your effec�ve tax rate tells you what percentage of your annual income you’ll owe to the IRS. To calculate your effec�ve tax rate, you’ll need a few pieces of informa�on: Your annual income. (Taxable income + income exempt from tax) Your total federal income tax liability. Effec�ve tax rate = Tax/ Total income Preferred Stock One main difference from common stock is that preferred stock comes with no vo�ng rights. So when it comes �me for a company to elect a board of directors or vote on any form of corporate policy, preferred shareholders have no voice in the future of the company. In fact, preferred stock func�ons similarly to bonds since with preferred shares, investors are usually guaranteed a fixed dividend in perpetuity. Common Stock Common stock represents shares of ownership in a corpora�on and the type of stock in which most people invest. When people talk about stocks, they are usually referring to common stock. In fact, the great majority of stock is issued in this form. Common shares represent a claim on profits (dividends) and confer vo�ng rights. Investors most o�en get one vote per share owned to elect board members who oversee the major decisions made by management. Stockholders thus have the ability to exercise control over corporate policy and management issues compared to preferred shareholders. Sunk costs • Sunk costs are those which have already been incurred and which are unrecoverable. • In business, sunk costs are typically not included in considera�on when making future decisions, as they are seen as irrelevant to current and future budgetary concerns. • Sunk costs are in contrast to relevant costs, which are future costs that have yet to be incurred. • The sunk cost fallacy is a psychological barrier that �es people to unsuccessful endeavors simply because they've commi�ed resources to it. • Examples of sunk costs include salaries, insurance, rent, nonrefundable deposits, or repairs (as long as each of those items is not recoverable). Acquisi�on: • An acquisi�on is a business combina�on that occurs when one company buys most or all of another company's shares. • If a firm buys more than 50% of a target company's shares, it effec�vely gains control of that company. • An acquisi�on is o�en friendly, while a takeover can be hos�le; a merger creates a brand new en�ty from two separate companies. • Acquisi�ons are o�en carried out with the help of an investment bank, as they are complex arrangements with legal and tax ramifica�ons. • Acquisi�ons are closely related to mergers and takeovers. Merger: • Mergers are a way for companies to expand their reach, expand into new segments, or gain market share. • A merger is the voluntary fusion of two companies on broadly equal terms into one new legal en�ty. • The five major types of mergers are conglomerate, congeneric, market extension, horizontal, and ver�cal.
What Is a Yield Curve?
A yield curve is a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates. The slope of the yield curve gives an idea of future interest rate changes and economic activity. There are three main shapes of yield curve shapes: normal (upward sloping curve), inverted (downward sloping curve), and flat. Investors can use the yield curve to make predic�ons on where the economy might be headed and use this informa�on to make their investment decisions. If the bond yield curve indicates an economic slowdown might be on the horizon, investors might move their money into defensive assets that tradi�onally do well during recessionary �mes, such as consumer staples. If the yield curve becomes steep, this might be a sign of future infla�on. In this scenario, investors might avoid long-term bonds with a yield that will erode against increased prices
Paper : 2022
Define risk and elaborate its types?
Risk: Although it is o�en used in different contexts, risk is the possibility that an outcome will not be as expected, specifically in reference to returns on investment in finance. However, there are several different kinds or risk, including investment risk, market risk, infla�on risk, business risk, liquidity risk and more. Kinds Business Risk In a nutshell, business risk is the exposure a company has to various factors like compe��on, consumer preferences and other metrics that might lower profits or endanger the company's success. Vola�lity Risk Par�cularly in investment, vola�lity risk refers to the risk that a por�olio may experience changes in value due to vola�lity (price swings) based on the changes in value of its underlying assets - par�cularly a stock or group of stocks experiencing vola�lity or price fluctua�ons. Infla�on Risk Infla�on risk, some�mes called purchasing power risk, is the risk that the cash from an investment won't be worth as much in the future due to infla�on changing its purchasing power. Infla�on risk primarily examines how infla�on (specifically when higher than expected) may jeopardize or reduce returns due to the eroding the value of the investment. Market Risk Market risk is a broad term that encompasses the risk that investments or equi�es will decline in value due to larger economic or market changes or events. Under the umbrella of "market risk" are several kinds of more specific market risks, including • equity risk, • interest rate risk and • currency risk. Liquidity Risk Liquidity risk is involved when assets or securi�es cannot be liquidated (that is, turned into cash) fast enough to ride out an especially vola�le market. This kind of risk affects businesses, corpora�ons or individuals in their ability to pay off debts without suffering losses. Risk Management Risk management is the process and strategy that investors and companies alike employ to minimize risks in a variety of contexts. Risk management can range from inves�ng in low-risk securi�es to por�olio diversifica�on to credit score approval for loans and much more.
What are the types of financial markets?
Financial markets, from the name itself, are a type of marketplace that provides an avenue for the sale and purchase of assets such as bonds, stocks, foreign exchange, and deriva�ves. 1. Stock market The stock market trades shares of ownership of public companies. Each share comes with a price, and investors make money with the stocks when they perform well in the market. It is easy to buy stocks. The real challenge is in choosing the right stocks that will earn money for the investor. 2. Bond market The bond market offers opportuni�es for companies and the government to secure money to finance a project or investment. In a bond market, investors buy bonds from a company, and the company returns the amount of the bonds within an agreed period, plus interest. 3. Commodities market The commodi�es market is where traders and investors buy and sell natural resources or commodi�es such as corn, oil, meat, and gold. A specific market is created for such resources because their price is unpredictable. There is a commodi�es futures market wherein the price of items that are to be delivered at a given future �me is already iden�fied and sealed today. 4. Derivatives market Such a market involves deriva�ves or contracts whose value is based on the market value of the asset being traded. The futures men�oned above in the commodi�es market is an example of a deriva�ve. Func�ons of the Markets The role of financial markets in the success and strength of an economy cannot be underes�mated. Here are four important func�ons of financial markets: 1. Puts savings into more productive use As men�oned in the example above, a savings account that has money in it should not just let that money sit in the vault. Thus, financial markets like banks open it up to individuals and companies that need a home loan, student loan, or business loan. 2. Determines the price of securities Investors aim to make profits from their securi�es. However, unlike goods and services whose price is determined by the law of supply and demand, prices of securi�es are determined by financial markets. 3. Makes financial assets liquid Buyers and sellers can decide to trade their securi�es any�me. They can use financial markets to sell their securi�es or make investments as they desire. 4. Lowers the cost of transactions In financial markets, various types of informa�on regarding securi�es can be acquired without the need to spend. What Is Just-in-Time (JIT)? The just-in-�me (JIT) inventory system is a management strategy that aligns raw-material orders from suppliers directly with produc�on schedules. Companies employ this inventory strategy to increase efficiency and decrease waste by receiving goods only as they need them for the produc�on process, which reduces inventory costs. This method requires producers to forecast demand accurately. Example of JIT Famous for its JIT inventory system, Toyota Motor Corpora�on orders parts only when it receives new car orders. Although the company installed this method in the 1970s, it took 20 years to perfect it. Capital budge�ng Process? 3 components of Cash Flow?
Managerial op�ons in Capital Budge�ng ?
Management flexibility to make future decisions that affect a project’s expected cash flows, life, or future acceptance. Project Worth = NPV + Op�on(s) Value • Abandon Allows the project to be terminatedν early. • Expand (or contract) Allows the firm to expand (contract) produc�onν if condi�ons become favorable (unfavorable). • Postpone Allows the firm to delay undertaking a projectν (reduces uncertainty via new informa�on)
