Professional Documents
Culture Documents
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addresses the ways in which individuals, business entities and
other organizations allocate and use monetary resources over time. The
term Y
may thus incorporate any of the following:
Money that is made available by banks and other sources for commercial
use through short term and long term loans and equity share capital.
Managerial finance is the branch of the finance that concerns itself with
the managerial significance of finance techniques. It is focused on
assessment rather than technique.
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Decisions concerning the asset side of a firm's balance sheet, such as the
decision to offer a new product.
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and paid off the nearly $5 million it owed suppliers. FÃIL's shareholders,
as residual owners, received just pennies to distribute amongst
themselves.
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business owner and other top executives make the tangible connection
between a company's operations and its financial performance.
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Capital received from investors for stock, equal to capital stock plus paid-
in capital. Ãlso called contributed capital.
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Buying a stock means ownership in a company and ownership gives you
certain rights. While common shareholders might be at the bottom of the
ladder when it comes to liquidation, this is balanced by other
opportunities like share price appreciation. Ãs a shareholder, knowing
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In general, costs enabling you to run the business and are incurred for
business purposes are tax deductible.Equipment purchased to be used by
the business receives a tax deduction in the way of capital allowances, the
rules for which changed in Ãpril 2008.
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The dividend tax is one of the most common investment taxes paid
investors, whether you own 100 shares of Johnson & Johnson or
1,000,000 shares of McDonald's. The rules on how the dividend tax works
and specific dividend tax rates, however, are not very well understood.
This guide was put together to help you understand the basics.
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Interest is calculated based on how much tax you owe. Interest rates
change every three months. Currently, the IRS interest rate for
underpayment of tax is <+ The interest is calculated for each
day your balance due is not paid in full.
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will influence the design and, ultimately, the people who will reap the
benefits of your completed project. It is extremely important to involve
stakeholders in all phases of your project for two reasons: Firstly,
experience shows that their involvement in the project significantly
increases your chances of success by building in a self-correcting feedback
loop; Secondly, involving them in your project builds confidence in your
product and will greatly ease its acceptance in your target audience.
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Financial environment of a company refers to all the financial institutions
and financial market around the company that affects the working of the
company as a whole. The financial environment has a number of factors.
It includes the financial institutions, government, individuals and firms
around the business. Firms use their financial markets to keep their
savings as property. It is extremely important for the monetary markets.
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à market for the exchange of capital and credit, including the money
markets and the capital markets.
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It is also called the new issue market, is the market for issuing new
securities. Many companies, especially small and medium scale, enter the
primary market to raise money from the public to expand their
businesses. They sell their securities to the public through an initial public
offering. The securities can be directly bought from the shareholders,
which is not the case for the secondary market. The primary market is a
market for new capitals that will be traded over a longer period.
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It is the market where, unlike the primary market, an investor can buy a
security directly from another investor in lieu of the issuer. It is also
referred as "after market".
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The securities initially are issued in the primary market, and then they
enter into the secondary market. Ãll the securities are first created in the
primary market and then, they enter into the secondary market. In the
New York Stock Exchange, all the stocks belong to the secondary market.
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The possibility that a bond issuer will default, by failing to repay principal
and interest in a timely manner. Bonds issued by the federal government,
for the most part, are immune from default (if the government needs
money it can just print more). Bonds issued by corporations are more
likely to be defaulted on, since companies often go bankrupt.
Municipalities occasionally default as well, although it is much less
common.
credit risk.
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Book Tax
Income Income
Income $10,000 $10,000
Depreciation 1,000 1,500
Income before tax $ 9,000 $ 8,500
Tax expense($9000 x 34%) $ 3,060 15
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à process whereby the value of an investment increases exponentially
over time due to compound interest.
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This concept is realized when that dollar is invested or put into savings.
Ãssuming no risk, in the future, that dollar will have accumulated interest.
Compounding interest is when the interest and the original principle are
reinvested to accumulate interest on the larger whole.
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!Y the present value (PV) as the cash in hand today that will be
invested, and the future value (FV) as the amount of money you will
possess when the investment has matured, you can then take the interest
(I) per compounding period and the number (n) of periods between the
present and future and compute FV = PV*(1+I)^n. That is, multiply the
present value by one plus the interest n times in order to get the future
value.
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Let¶s say you have a 5% ÃPR savings account, which is compounded daily
and you invest $100 dollars in. The interest per day is .05/365 = .0137%.
Ãt the end of one year, the future value of the savings account is
$100*(1+.000137)^365 = $105.13.
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particular future value. This can be computed from the above formula, by
dividing the compounded interest and obtaining PV = FV/(1+I)^n. Lets
take the interest above, and suppose we want to have $1500 at the end of
five years.
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$1500/(1+.000137)^(365*5) = $1168.23.
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Suppose we buy a 1 year bond for face value that pays 6% at the end of the
year. We pay $100 at the beginning of the year and get $106 at the end of
the year. Thus the bond pays an interest rate of 6%. This 6% is the nominal
interest rate, as we have not accounted for inflation. Whenever people
speak of the interest rate they're talking about the nominal interest rate,
unless they state otherwise.
Now suppose the inflation rate is 3% for that year. We can buy a basket of
goods today and it will cost $100, or we can buy that basket next year and
it will cost $103. If we buy the bond with a 6% nominal interest rate for
$100, sell it after a year and get $106, buy a basket of goods for $103, we
will have $3 left over. So after factoring in inflation, our $100 bond will
earn us $3 in income; a real interest rate of 3%. The relationship between
the nominal interest rate, inflation, and the real interest rate is described
by )
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If inflation is positive, which it generally is, then the real interest rate is
lower than the nominal interest rate. If we have deflation and the inflation
rate is negative, then the real interest rate will be larger.
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Let's assume you want to deposit in a bank $1000. The bank will pay you
10% interest annually. This means that at the end of the year you will
receive 10% x $1000 = $100 and this rate will turn your $1000 into $1100.
In this example, the effective interest rate is the same as the quoted
interest (10%).
Now let's examine the same example of a stated annual rate of 10% but
this time the bank will pay it semi-annually (the compounding will occur
twice a year). This means that when the first payment occurs the bank will
pay you 5% x $1000 = $50. However, at the end of the year, when the
second payment occurs, the bank will pay you 5% x $1050 = $52.50 and
this will turn your $1000 into $1102.50 . Thus, for the whole year you
would have actually earned $102.50 and the effective interest rate would
be 10.25% (more than the quoted interest of 10%).
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that accounts for the effect of compounding.
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B3 = The amount that could be realized if an asset were
sold independently of the going concern.
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equity security, par value is usually a very small amount that bears no
relationship to its market price, except for preferred stock, in which case
par value is used to calculate dividend payments. For a debt security, par
value is the amount repaid to the investor when the bond matures
(usually, corporate bonds have a par value of $1000, municipal bonds
$5000, and federal bonds $10,000). In the secondary market, a bond's
price fluctuates with interest rates. If interest rates are higher than the
coupon rate on a bond, the bond will be sold below par value (at a
"discount"). If interest rates have fallen, the price will be sold above par
value. It is
face value or par.
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The current quoted price at which investors buy or sell a share of
common stock or a bond at a given time. Ãlso known as "market price".
The market capitalization plus the market value of debt. Sometimes
referred to as "total market value".
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Debt investments and equity investments recorded using the cost method
are classified as trading securities, available-for-sale securities, or, in the
case of debt investments, held-to-maturity securities. The classification is
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based on the intent of the company as to the length of time it will hold each
investment. Ã debt investment classified as ) + means the
business has the intent and ability to hold the bond until it matures. The
balance sheet classification of these investments as short-term (current) or
long-term is based on their maturity dates.
These are those which were bought for the purpose of selling them within
a short time of their purchase. These investments are considered short-
term assets and are revalued at each balance sheet date to their current
fair market value. Ãny gains or losses due to changes in fair market value
during the period are reported as gains or losses on the income statement
because, by definition, a trading security will be sold in the near future at
its market value. In recording the gains and losses on trading securities, a
valuation account is used to hold the adjustment for the gains and losses
so when each investment is sold, the actual gain or loss can be determined.
The valuation account is used to adjust the value in the trading securities
account reported on the balance sheet. For example if the Brothers
Quartet, Inc. has the following investments classified as trading securities,
an adjustment for $9,000 is necessary to record the trading securities at
their fair market value.
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Securities 00
The entry to record the valuation adjustment is:
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à bond with no maturity date. Perpetual bonds are not redeemable but
pay a steady stream of interest forever. Some of the only notable
perpetual bonds in existence are those that were issued by the British
Treasury to pay off smaller issues used to finance the Napoleonic Wars
(1814). Some in the U.S. believe it would be more efficient for the
government to issue perpetual bonds, which may help it avoid the
refinancing costs associated with bond issues that have maturity dates. Ã
perpetual bond is also known as a 'consol'.
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Bond that (1) pays no interest but instead is sold at a deep discount on its
par-value, or (2) an interest paying bond that has been stripped of its
coupon which is sold separately as a security in its own right.
Bondholder's income is determined by the difference between the bond's
redemption value on maturity and its purchase price. Ãlso called non-
interest bearing Bond, zero interest bond, or zero rated bond.
It is a loan (or security) that ranks below other loans (or securities) with
regard to claims on assets or earnings. Ãlso known as a "junior security"
or "subordinated loan".
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It is the cost of passing up the next best choice when making a decision.
For example, if an asset such as capital is used for one purpose, the
opportunity cost is the value of the next best purpose the asset could have
been used for. Opportunity cost analysis is an important part of a
company's decision-making processes, but is not treated as an actual cost
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1) Income Statement
2) Retained Earnings Statement
3) Balance Sheet
4) Statement of Cash Flows
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When dividends are given in the form of additional
shares of the same company or its subsidiary corporation according to the
proportion of the shares owned.
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Special Dividends are offered rarely, such as during
times when the company wins litigation, when the company sells a
business or liquidation of investments. Some companies also offer special
dividends when they have high amount of excess cash, in order to boost
the market value of their stocks. Some times these special dividends are
documented as return of capital, meaning the company is returning a
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reports each amount on a financial statement as a
percentage of another item. For example, the vertical analysis of the
balance sheet means every amount on the balance sheet is restated to be a
percentage of total assets. If inventory is $100,000 and total assets are
$400,000 then inventory is presented as 25 ($100,000 divided by
$400,000). If cash is $8,000 then it will be presented as 2 ($8,000 divided
by $400,000). The total of the assets will now add up to 100. If the
accounts payable are $88,000 they will be presented as 22 ($88,000
divided by $400,000). If owner¶s equity is $240,000 it will be presented
as 60 ($240,000 divided by $400,000). The restated amounts from the
vertical analysis of the balance sheet will be presented as a common-size
balance sheet. Ã common-size balance sheet allows you to compare your
company¶s balance sheet to another company¶s balance sheet or to the
average for its industry.
Vertical analysis of an income statement results in every income statment
amount being presented as a percentage of sales. If sales were $1,000,000
they would be restated to be 100 ($1,000,000 divided by $1,000,000). If
the cost of goods sold is $780,000 it will be presented as 78 ($780,000
divided by sales of $1,000,000). If interest expense is $50,000 it will be
presented as 5 ($50,000 divided by $1,000,000). The restated amounts
are known as a common-size income statement. Ã common-size income
statement allows you to compare your company¶s income statement to
another company¶s or to the industry average.
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looks at amounts on the financial statements over
the past years. For example, the amount of cash reported on the balance
sheet at December 31 of 2006, 2005, 2004, 2003, and 2002 will be
expressed as a percentage of the December 31, 2002 amount. Instead of
dollar amounts you might see 134, 125, 110, 103, and 100. This shows that
the amount of cash at the end of 2006 is 134% of the amount it was at the
end of 2002. The same analysis will be done for each item on the balance
sheet and for each item on the income statement. This allows you to see
how each item has changed in relationship to the changes in other items.
Horizontal analysis is also referred to as trend analysis.
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The average time between purchasing or acquiring inventory and
receiving cash proceeds from its sale.
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It is the average length of time between when a company purchases items
for inventory and when it receives payment for sale of the items. The
operating cycle is equal to the average age of inventories plus the average
collection period. Ã long operating cycle tends to reduce profitability by
increasing borrowing requirements and interest expense. It is also
called normal operating cycle.
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The length of time between when a company pays for purchases of
inventory and when it receives cash from its own customers who purchase
the inventory. For example, a retailer orders goods on January 4 with
payment due on January 14. The goods are sold on January 10 with
payment received from customers on January 31. The cash conversion
cycle is 17 days, the difference between January 14, when the company
pays its suppliers, and January 31, when the company receives payment
from its own customers. Ã short cash conversion cycle allows a business to
quickly acquire cash that can be used for additional purchases or debt
repayment.
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à cash flow statement is the motor oil for any business finance engine. It
measures the amounts of money that come into a company and out of it
over a given time period. This way a company is able to keep track of how
much cash it has on hand to pay expenses and buy assets.
Cash flow statements use information from both income statements and
balance sheets. Using this information, the cash flow statement will reveal
the net increase or decrease in cash for the period. Most cash flow
statements are divided into three separate activities: operating activities,
investing activities, and financing activities.
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: Operating activities shows cash flow from net
income to net losses to cash used in and for operation procedures.
Sometimes, non- cash items are adjusted for any cash that was used or
provided by utilizing other operating assets and liabilities.
Investing activities is usually the second part of a
cash flow statement. This includes the purchases or sales of long-term
assets, such as property, equipment, and even stocks. These actions are
still represented as " cash in" or " cash out" depending on what is
purchased.
This is the third part of the cash flow statement.
Ãnd, as the name might suggest, the financing activities section tracks
financing activities. For large companies this includes money raised by
issuing stock in the company, or borrowing many from banks. Paying
back these loans are also considered under this section of the cash flow
statement.
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Deals or transactions involving sale or purchase of
equipment, plants, properties, securities, or other assets generally
not held for immediate resale.
Initiatives, transactions, and events (such as issuing of
stock/shares, bonds, promissory note, and arranging of
loans and supplies) employed and undertaken by an organization in
achieving its economic objectives.
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It includes transactions and events that directly affect a firm's cash
inflows and outflows, and determine its net income. Cash
inflows result from sales of goods or services, sale of firm's stock (shares),
and from income earned on investments. Cash result
from equipment and inventory
purchases, interest and principal payments on loans, salaries, dividends,
and various other costs and expenses.
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Financial planning offers a coordinated and comprehensive approach to
helping you achieve your personal and reasonable financial goals.
Building, managing and preserving wealth is not an easy task. Maybe you
have recently retired and are concerned about outliving your nest egg.
Perhaps you are a baby boomer trying to plan for a secure retirement.
Maybe you are part of the "sandwich generation", caring for your own
children at home while also caring for the needs of aging parents. Maybe
you are recently widowed or divorced with all of the complications that
these life challenges bring. Maybe you have accumulated substantial
wealth and want to protect your assets from lawsuits, spendthrift
relatives, divorce or other potential threats not only to yourself but also to
your heirs. Selecting appropriate investments is simply one ingredient in
the recipe for an effective financial plan that should also include
retirement and estate planning. Ãn experienced financial planning team
should help you to:
m Identify your goals.
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mind.
Implement and monitor the financial plan.
If you are already retired, the following may be very real risks that
you are currently facing.
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Projected Financial Statements is summary of various component
projections of revenues and expenses for the budget period. Projected
Financial Statements indicates the expected net income for the period.
Projected Financial Statements are an important tool in determining the
overall performance of a company. Projected financial statements have
the balance sheet, income statement and cash flow statements to indicate
the company performance.
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The principal way that the SEC fulfills its mission is by
creating and enforcing regulations that set the standards for the public
disclosure of financial information by public companies. Its main areas of
enforcement activity are:
Õm Insider trading
Õm Ãccounting fraud
Õm False or misleading investment information OR
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a government agency whose purpose is to develop a modern and
efficient corporate sector and a capital market based on sound regulatory
principles, in order to foster economic growth and prosperity in Pakistan.
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Ãn exchange on which shares of stock and common stock equivalents are
bought and sold. Examples include the NYSE and the ÃMEX.
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advantage over other market participants
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transactions are settled in the fastest possible way
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about the particular stock based on information. Listed companies
must disclose information in timely, complete and accurate manner
to the Exchange and the public on a regular basis. Required
information include stock price, corporate conditions and
developments dividend, mergers and joint ventures, and
management changes etc
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, which represents the accumulated loss in
market value caused by physical wear and tear since the date the
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, which describes the loss of value caused
by outmoded or inadequate design
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For example, coal mines, oil fields and other natural resources are
depleted on company accounting statements. This reduction in the
quantity of resources is meant to assist in accurately identifying the value
of the asset on the balance sheet.
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Blanket, unconditional contract between the bond issuer and the bond
purchaser (bondholder) that specifies the terms of the bond. It states the
interest rate (called coupon rate), the dates when the interest will be paid,
maturity date(s), and other terms and conditions of the bond issue.
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The first sale of stock by a private company to the public. IPOs are
often issued by smaller, younger companies seeking the capital to expand,
but can also be done by large privately owned companies looking to
become publicly traded.
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à company that is publicly-traded but has more than half its stock owned
by another company, known as the parent company. Ãs long as the parent
company owns more than half the stock, it maintains control of the
subsidiary, though its other stock is still traded. Some subsidiaries belong
to the same industry as the parent company, while others do not.
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It is a type of preferred stock that carries the provision that the issuer has
the right to call in the stock at a certain price and retire it. It is also known
as "redeemable preferred stock".
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Preferred stock that includes an option for the holder to convert the
preferred shares into a fixed number of common shares, usually anytime
after a predetermined date.
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inside. Thus, it tends to offer a lower rate of return in exchange for the
value of the option to trade the bond into stock.
In finance, a
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convert into shares of common stock in the issuing company or cash of
equal value, at an agreed-upon price.
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holders can exchange for a predetermined number of the company's
common stock. This exchange can occur at any time the investor
chooses regardless of the current market price of the common stock.
It is a one way deal so one cannot convert the common stock back to
preferred stock.
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: It isMoney that the issuer must pay to the holder of a bond
when it is redeemed. It is the sum of the par value and the call premium,
and is specified in the bond indenture.
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is redeemed at its maturity. For most securities, maturity value equals par
value.
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(or non-public offering) is a funding round of
securities which are sold without an initial public offering, usually to a
small number of chosen private investors.
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Sam's initial investment to start up XYZ, Inc. was $20,000 for plant and
equipment.
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Before you invest, it's important to make sure you know what your goals
are and how to attain them. The best way to determine your goal and how
to achieve it is to understand how your investment will be calculated and
do the math yourself
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Determine your goal, what interest rate you will get and how many
years you want will be investing your money.
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Since you are actually looking for the initial amount you should
invest, you will need to re-write the interest formula to P = F / (1 +
i)^n
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Solve the formula. The numbers inside the parentheses are added
together first, then you solve the exponential part of the formula,
then you can divide.
P = 250,000 / (1 + 0.022)^45
P = 250,000 / (1.022)^45
P = 250,000 / 2.6625
P = 93,897
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Net income plus depreciation and amortization. See also cash flows from
operating activities. m
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For this example, we'll use Microsoft's 2007 annual report. The
company reported EBIT (operating income) of $18,524, depreciation
of $1,440, and taxes of $6,036 (numbers in millions). So the math
looks like this:$18,524+ $1,440- $6,036= $13,928. In other words,
Microsoft's operating cash flow for 2007 was $13,928.
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Õm Is the last stage of a project¶s cash flows re: the cash flows that will
occur only at the project¶s termination/ending.
Õm Examples are: salvage/scrap value of new machines less tax and net
working capital recovered
Company XYZ intends to buy a new machine to increase its present sales.
The machine costs $200,000 with five years of useful life and its salvage
value is $25,000. By buying this machine, the company will incur
additional yearly working capital requirements of $10,000. Calculate the
terminal cash flows.
Solution:
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The difference between the present value of cash inflows and the present
value of cash outflows. NPV is used in capital budgeting to analyze the
profitability of an investment or project. NPV analysis is sensitive to
the reliability of future cash inflows that an investment or project will
yield.
Formula:
In addition to the formula, net present value can often be calculated using
tables, and spreadsheets such as Microsoft Excel.
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The discount rate often used in capital budgeting that makes the net
present value of all cash flows from a particular project equal to zero.
Generally speaking, the higher a project's internal rate of return, the more
desirable it is to undertake the project. Ãs such, IRR can be used to rank
several prospective projects a firm is considering. Ãssuming all other
factors are equal among the various projects, the project with the highest
IRR would probably be considered the best and undertaken first.
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Ãn index that attempts to identify the relationship between the costs and
benefits of a proposed project through the use of a ratio calculated as:
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time it takes for a company to recoup its investment dollars.
There are two drawbacks to the payback model: (a) cash flows are not
discounted for the time value of money, meaning that a dollar received
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three years from now has the same value as a dollar received in the
current year, and (b) it fails to consider the profitability of the project in
its entirety. For example, a project with a fast initial payback might not
generate much profit over its life. Ãnother project with a slow initial
payback might be phenomenally profitable over its life because its
profitability increases dramatically after the payback period.
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=. This method of evaluating business investments
estimates all of the cash flowing in and out of a project. The estimated
cash flows are then discounted to the present to reflect the time value of
money.
When the net present value is a positive amount, the project is earning
more than the rate used to discount the cash flows. Ãs you can see from
the above table, Treeline's proposed project is showing a positive net
present value of $14,668. This means that the new machine will provide
Treeline with FA##
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Since the internal rate of return model produces the rate that will discount
all of the cash back to a net present value of exactly zero, you may need to
try various rates (as shown in present value tables) until you find the
exact rate that gives you zero. (You will save time by using a computer,
financial calculator, or programmable calculator.)
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The total time period between when a check is prepared by the remitter
and when the check is presented for payment. This float also includes the
delivery float, processing float, and transit float. Disbursement float is the
float period for the remitter. The collection float for the organization that
will receive the check is the same duration as the disbursement float.