The most important and also the most difficult part of an investment analysis is to calculate the  cash flow associated with the project; the cost of funding the project; the cash inflow during  the life of the project; and the terminal, or ending value of the project. Shareholders are  interested in how many additional rupees they will receive in future for the rupees they lay out  today. Hence, what matters is not the project’s total cash flow per period, but the incremental  cash flow for a variety of reasons. They include; Cannibalization: When a new product is introduced it may take away the sales of existing  products. Cannibalization also occurs when a firm builds a plant overseas and winds up  substituting foreign production for parent company exports. In this case company may lose  exports because it is supplying from its overseas production center. To the extent that sales of a Continue reading
Financial Management Tools
Statement of Cash Flows
The statement of cash flows is one of three very important financial reports that managers and investors look at when analyzing a company’s past or present financial status. The balance sheet and the income statement are the other two reports. All of these reports are very important in running a successful business, but the statement of cash flows is the most important. It is like the blood of a company since it would not survive successfully without it. Cash on hand can actually be much more important than income, profits, assets, and liabilities put together, especially in the early stages of any company. The statement of cash flows tells us how much cash we have on hand after all costs are met. It shows how much cash we started with and how much we pay out. There are two parts to the statement of cash flows which are the top Continue reading
Importance of Capital Investment Decisions
Investment decision otherwise known as capital budgeting decision is  perhaps the most important decision taken by a Finance Manager.  Whatever is the objective of the firm, whether profit maximization or  wealth maximization, capital budgeting decision affects performance of  the firm decisively. These investment decisions have the following  implications for the firm. They define the strategic focus and direction of the business. The capital  expenditure made in new investments may result in entry into new products,  services or new markets. Capital budgeting decisions require large funds and generally have long  repayment periods. The results of capital budgeting continue to impact the  finances of the firm for many years. Due to long project life, assessment  involves number of years of future events leading to difficulty and uncertainty  regarding the accuracy of assessment. Capital budgeting decisions are mostly irreversible. They involve investment in  plant and machinery or new soft wares or technology etc. Continue reading
Dividend Decision
Meaning and Definition of  Dividend Dividend is defined as the distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders. The dividend is most often quoted  in terms of the dollar amount each share receives (dividends per share). It can also be quoted in terms of a percent of the current market price, referred to as dividend yield. Dividend is a taxable  payment  declared by a  company’s  board of directors  and given to its  shareholders  out of the company’s  current  or  retained earnings, usually quarterly. Dividends are usually given as  cash  (cash dividend), but they can also take  the  form  of  stock  (stock dividend) or other  property. Dividends provide an incentive  to  own  stock in  stable  companies even if they are not experiencing much  growth. Companies are not  required  to  pay  dividends. The companies that offer  dividends are most often Continue reading
Audit Quality – Meaning and Factors Affecting It
The major accounting scandals occurred worldwide has brought the focus of public to the audit profession and the audit quality. Enron and WorldCom cases in United States and Parmalat case in Europe are the example of major scandals as a result of the failure of audit services. These examples of corporate and accounting scandals that happened worldwide have indicated that the audit quality of the audit profession is not at an appropriate and acceptable level. Over years, the audit quality issue has been discussed and debated globally. Several actions have been taken by international and domestic authorized agencies to address the audit quality issue. For example, the government of United States has introduced and enacted the Sarbanes-Oxley Act in 2002 as a response to the audit failure in big major corporations, such as Enron and World Com. In addition, the Center for Audit Quality has been established in United States Continue reading
Marakon Model of Shareholder Value Creation
The Marakon model was developed by Marakon Associates, a management consulting firm known for its work in the field of value-based management. According to Marakon model, a firm’s value is measured by the ratio of its market value to the book value. An increase in this ratio depicts an increase in the value of the firm, and a reduction reflects a reduction in the firm’s value. The model further states that a firm can maximize its value by following these four steps: Understand the financial factors that determine the firm’s value Understand the strategic forces that affect the value of the firm Formulate strategies that lead to a higher value for the firm Create internal structures to counter the divergence between the shareholders  goals and the management’s goals. 1. Financial Factors The first step in this model is to identify the financial factors that affect the value of the firm. Continue reading