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General Business Articles

Debt Equity Ratio

Meaning of Debt Equity Ratio

Capitalization of a company consists of funds raised by issuing various types of securities, i.e., ordinary shares, preference shares, debentures etc.

To decide as to the ratio of various types of securities to total capitalization is a very difficult task but the decision in this important for the business to decide as to the ratio of ownership capital to the creditorship capital or loan capital. The ratio of borrowed capital to the owned capital may be called debt equity ratio. In other words, debt equity ratio is the ratio between borrowed capital on the one hand and owned capital on the other.… Read the rest

Abey Francis

Bonds and Debentures

Definition of  Debentures

A company may not with to possess itself of the use of more share capital or ownership securities, and yet desire more available money. It may invite persons to kind their money as a loan, instead of contributing it as a part of the capital.

Money so lent must also be recorded and acknowledged. The document which the lender receives is called a debenture. The holder of this debenture is a creditor of the company, while the shareholder is one of the proprietors of the capital of the company and so responsible for its liabilities. The debenture holder is one of the liabilities for which the shareholder is responsible.… Read the rest

Abey Francis

Accounting Rate of Return (ARR) Method of Capital Budgeting

Accounting Rate of Return (ARR) Method

Various proposals are ranked in order to rate of earnings on the investment in the projects concerned. The project which shows highest rate of return is selected and others are ruled out.

The Accounting Rate of Return is found out by dividing the average income after taxed by the average investment, i.e., average net value after depreciation. The accounting rate of return, thus, is an average rate and can be determined by the following equation.

Accounting Rate of Return (ARR) = Average income / Average investment

There are two variants of the accounting rate of return; Original Investment Method, and Average Investment Method.… Read the rest

Abey Francis

Payback Period Method of Capital Budgeting

Payback Period Method

The Payback period method of  capital budgeting  is popularly known as pay-off, pay out or replacement period methods also. It is the most popular and widely recognized traditional method of evaluating capital projects.

Payback period method represents the number of years required to recover the original cash outlay invested in a project. It is based on the principle that every capital expenditure pays itself back over a number of years. It attempts to measure the period of time, it takes for the original cost of a project to be recovered from the additional earnings of the project. It means where the total earnings (or net cash inflow) from investment equals the total outlay, that period is the pay-back period.… Read the rest

Abey Francis

Significance of Capital Budgeting

The key function of the financial management is the selection of the most profitable assortment of capital investment and it is the most important area of decision-making of the financial manager because any action taken by the manger in this area affects the working and the profitability of the firm for many years to come.

Significance of Capital Budgeting Decisions

The significance of capital budgeting can be emphasized taking into consideration the very nature of the capital expenditure such as heavy investment in capital projects, long-term implications for the firm, irreversible decisions and complicates of the decision making. Its importance can be illustrated well on the following other grounds:

1.… Read the rest

Abey Francis

Capital Budgeting- Definition, Nature and Procedure

Meaning of Capital Budgeting

Capital expenditure budget or capital budgeting is a process of making decisions regarding investments in fixed assets which are not meant for sale such as land, building, machinery or furniture.

The word investment refers to the expenditure which is required to be made in connection with the acquisition and the development of long-term facilities including fixed assets. It refers to process by which management selects those investment proposals which are worthwhile for investing available funds. For this purpose, management is to decide whether or not to acquire, or add to or replace fixed assets in the light of overall objectives of the firm.… Read the rest

Abey Francis