Finance

Definition: Miller and Modigliani Hypothesis or MM Approach supports the “dividend irrelevance theory”, stating that the dividends are irrelevant and has no effect on the firm’s share value. Also, it is believed that it is the investment policy that increases the value of the shares and hence should be given more importance than the payouts to the shareholders. To justify … [Read more...] about Proof of Miller and Modigliani Hypothesis

Definition: According to Miller and Modigliani Hypothesis or MM Approach, dividend policy has no effect on the price of the shares of the firm and believes that it is the investment policy that increases the firm’s share value. The investors are satisfied with the firm’s retained earnings as long as the returns are more than the equity capitalization rate “Ke”. What is an … [Read more...] about Miller and Modigliani theory on Dividend Policy

Definition: The Dividend Policy is a financial decision that refers to the proportion of the firm’s earnings to be paid out to the shareholders. Here, a firm decides on the portion of revenue that is to be distributed to the shareholders as dividends or to be ploughed back into the firm. The amount of earnings to be retained back within the firm depends upon the availability … [Read more...] about Dividend Policy

Definition: The Profitability Index measures the present value of returns derived from per rupee invested. It shows the relationship between the benefits and cost of the project and therefore, it is also called as, Benefit-Cost Ratio. The profitability Index helps in giving ranks to the projects on the basis of its value, the higher the value the top rank the project gets. … [Read more...] about Profitability Index

Definition: The Modified Internal Rate of Return or MIRR is a distinct improvement over the internal rate of return that assumes the cash flows generated from the project are reinvested at the firm’s cost of capital rather that at the company’s internal rate of return. The formula to calculate the Modified Internal Rate of Return is: Where, n= no. of periods Terminal … [Read more...] about Modified Internal Rate of Return

Definition: The Internal Rate of Return or IRR is a rate that makes the net present value of any project equal to zero. In other words, the interest rate that equates the present value of cash inflow with the present value of cash outflow of any project is called as Internal Rate of Return. Unlike the Net present value method where we assume that the discount rate is known, … [Read more...] about Internal Rate of Return

Definition: The Net Present Value or NPV is a discounting technique of capital budgeting wherein the profitability of investment is measured through the difference between the cash inflows generated out of the cash outflows or the investments made in the project. The formula to calculate the Net Present value is: Net present value = n∑t=1   Ct / (1+r)t – C0 Where, Ct = … [Read more...] about Net Present Value

Definition: The Average Rate of Return or ARR, measures the profitability of the investments on the basis of the information taken from the financial statements rather than the cash flows. It is also called as Accounting Rate of Return The formula for calculating the average rate of return is: Average Rate of Return = Average Income / Average Investment over the life of … [Read more...] about Average Rate of Return

Definition: The Payback Period helps to determine the length of time required to recover the initial cash outlay in the project. Simply, it is the method used to calculate the time required to earn back the cost incurred in the investments through the successive cash inflows. The formula to calculate it: Payback Period = Initial Outlay/Cash Inflows Accept-Reject … [Read more...] about Payback Period

Definition: The Capital Budgeting Techniques are employed to evaluate the viability of long-term investments. The capital budgeting decisions are one of the critical financial decisions that relate to the selection of investment proposal or the course of action that will yield benefits in the future over the lifetime of the project. Since the capital budgeting is related to … [Read more...] about Capital Budgeting Techniques