By using the information, manager can use cost of capital for restructure the market price and earning per share in order to bring advantage for company. By extension, it can help determine the decision whether to cancel or invest in project. Moreover, the cost of capital can help investors to determine the performance of the top management. With the intention of compare the ability of financial managers based on evaluation between the
As for stockholders they mainly use this information for forecasting dividends, earnings on the free cash flow. Question 2 What qualitative factors should analysts look for when evaluating a company’s likely future financial performance? Explain. When evaluating a company's future financial performance, some qualitative factors that should be considered are future prospects, the current environment weather it may be legal or regulatory, the competition , economy, the level of dependents on the
People respond to incentives People face trade offs when a consumer uses resources to purchase a product or service, understanding the resources used can not be used for a different purchase. This will cause the consumer to prioritize purchases, such as to pay the mortgage, before paying for a vacation. The cost of something is what you give up to get it, is when the consumer compares not only the price of a good or service, but if there are any long term cost associated with the expense. A good example of this is a pool, a consumer will compare prices of the pools available and take into consideration the maintenance required to keep the pool, such as chemicals and cleaning. Rational people think in the margins is simply means the purchase of a good is based on the marginal benefit the purchase will have for the person.
1. What are pricing objectives that firms may pursue? Answer : 1) Profit-Oriented * Designed to maximize price relative to competitors' prices, the products perceived value, the firm's cost structure, and production efficiency. Profit objectives are typically based on a target return, rather than simple profit maximization. 2) Volume-Oriented * Sets prices In order to maximize dollar or unit sales volume.
This is regularly taking into account interest for the merchandise and administrations it offers, contrasted with the expense of creating them. Financial specialists use forecasting to figure out whether an occasion influencing an organization, for example, deals desires, will expand or diminish the cost of shares in that organization. Forecasting additionally gives a critical benchmark to firms, which have a long haul viewpoint of operations. Stock experts use different forecasting routines to decide how a stock's cost will move later on. They may take a gander at income and contrast it with financial markers, or may take a gander at different pointers, for example, the quantity of new stores an organization opens or the quantity of requests for the merchandise it produces.
The RRR can also be called as the discount rate, hurdle rate or the opportunity cost of capital. NPV takes into account the principle in economics referred to as the “time value of money” which implies that a dollar earned today is more valuable than a dollar earned tomorrow. It is to be noted that projects with zero or positive NPV are acceptable to a company from a financial viewpoint as the return from these projects equals or exceeds the cost of capital. Internal rate of return (IRR) is the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero. IRR represents the discount rate at which the present value of the expected cash inflows from a project equals the present value of the expected cash outflows.
In modern finance theory (Manne, 1965), shareholder wealth maximization that are in line with a company’s business strategy is stated as the rational for investment and financing decisions made by managers. This means that firms should invest when the sum of the present values of future cash flows exceeds the initial project outlay. With M&A, the shareholder wealth maximization criterion is satisfied from the bidder’s perspective when the added value by the acquisition of a target company exceeds the cost of acquisition i.e. the transaction costs and the acquisition premium. Likewise, managers of targets would engage in M&A activity only if it results in gains to the target shareholders.
REAL OPTIONS AND THEIR INCORPORATION WITHIN CAPITAL BUDGETING A real option is a form of derivative, similar to a forward contract, but with a couple of important differences. A real option infers the right, but not an obligation, to buy an underlying real asset. The holder of a real option will compare the market value of the asset in question, along with the agreed exchange value on the option and can then decide whether to exercise that option or tear it up. This flexibility can come at considerable cost, which we will examine in the next section. The process of capital budgeting focuses on the incremental increase in cash flows associated with an investment decision or investment project.
When there is an established item, L.L Beans uses the trends based on past demand to forecast future sales ; these trends being mostly seasonal and therefore generates enough information to know how much stock is needed when. On the other hand, for new items, which do not have sufficient past demand data, L.L.Beans uses the A/F ratio which is based on past behavior of individuals with the actual demand. Once this is done, LL.Beans must calculate the profitability of the item and the overstock and under stock costs which calculates the optimal amount of the item. Question 2: What item costs and revenues are relevant to the decision of how many units of that item to stock? The manufacturing cost for LL Beans and the price at which the item is sold are relevant to the decision of how many units of that item to stock because with this the profit margin of each item is calculated giving an optimal balance of how much to of the item to stock.
The amount of cash, or its equivalent, that could be obtained by selling an asset in an orderly liquidation. Net Realizable Value Method. The amount of cash, or its equivalent, into which an asset is expected to be converted in the due course of business, less any direct costs necessary to make that conversion. Discounted Future Cash Flows Method. For an asset: the present value of future cash inflows into which an asset is expected to be converted in the due course of business, less present values of cash outflows