Interest rates exert the following economic influences. Interest rates in a country influence the foreign exchange value of the country’s currency. Interest rates act as a guide to the return that a company’s shareholders might want, and changes in market interest rates will affect share prices. A positive real rate of interest enhances an investor’s real wealth to the income he earns from his investments. However, when interest rates go up or down, perhaps due to a rise or fall in the rate of inflation, there will also be a potential capital loss or gain for the investor. In other words, the market value of interest-bearing securities will alter. Market values will fall when interest rates go up and vice versa. Interest Rates are Important for Financial Decisions by Companies Interest rate is important for financial decisions by companies. The incidence of the interest rates can have the following effects. Continue reading
Financial Concepts
Profit Maximization Objective of a Firm
In the conventional theory of the firm, the principle objective of a business firm is to maximize profit. Under the assumptions of given taste and technology, price and output of a given product under competition are determined with the sole objective of maximization of profit. Profit maximization refers to the maximization of dollar income of the firm. Under profit maximization objective, business firms attempt to adopt those investment projects, which yields larger profits, and drop all other unprofitable activities. In maximizing profits, input-output relationship is crucial, either input is minimized to achieve a given amount of profit or the output is maximized with a given amount of input. Thus, this objective of the firm enhances productivity and improves the efficiency of the firm. The conventional theory of the firm defends profit maximization objective on the following grounds: In a competitive market only those firms survive which are able to make Continue reading
Predicting Financial Distress and Corporate Failure
The financial failure of a company can have a devastating effect on all seven users of financial statements e.g. present and potential investors, customers, creditors, employees, lenders, the general public, etc. As a result, users of financial statements as indicated previously are interested in predicting not only whether a company will fail, but also when it will fail e.g. to avoid high profile corporate failures at Enron, Arthur Anderson, and WorldCom, etc. Users of financial statements can predict the financial position of an organization using the Altman Z score model, Argenti A score model, and by looking at the financial statements i.e. balance sheet, income statements, and cash flow statements. Business failure is defined as the unfortunate circumstance of a firm’s inability to stay in the business. Business failure occurs when the total liabilities exceed the total assets of a company, as total assets are considered a measure of the Continue reading
Introduction to Commercial Credit Analysis
Businessmen need loans for their businessess. There are many instances when the applicant (businessman), unaware of the bank’s needs, does not present all the details required or presents it in a manner that causes the Bank to reject the application. At other times, as the information given is incomplete, the applicant is harassed by demands for more information and then after he has submitted that asked for for yet some more. Time drags on while the bedeviled applicant runs hither and thither exasperated, frustrated and harrowed. The banker is also exasperated, frustrated and harrowed. He exists to make loans but before he approves the application and permits disbursal, as a responsible professional, he has to be convinced that the borrower has the capacity and the willingness to repay. Nothing thrills him more than a well presented detailed application that addresses all the concerns that he may have. Credit Management seeks Continue reading
The Concept of Time Value of Money
The concept of time value of money suggests that the money received at different point of time has different values. The financial manager must appreciate this fact and understand why they are different and how they are made comparable. Time value of money is a concept to understand the value of cash flows occurred at different point of time. If we are given the alternatives whether to accept $ 100 today or one year fro now, then we certainly accept $ 100 today. It is because there is a time value to money. Every sum of money received earlier has reinvestment opportunity. For example, if we deposited $ 100 in saving account at 5% annual rate of interest, it will increase to $ 105 at the end of one year. Money received at present is preferred even if we do not have reinvestment opportunity. The reason is that the money Continue reading
Case Studies on Debt Recovery Management
Case Study 1: HDFC Bank Recovery Mr.Kaushik Agarwal, about 18 months back had purchased 1 Tata Indigo, financed by HDFC bank. His EMI for this month (May’08) was bounced due to some reasons. The recovery person called him on the 22nd May for the payment of the same. He was out of town at that moment so Mr.Kaushik had asked him to send someone to his office on the 24th to collect cash. Now on 24th it slipped out of Kaushik’s mind that he had to pay cash to HDFC Bank and hence he did not withdraw any cash from the bank. As it was a Saturday so when the person came for collection, he requested him to come on Monday, as the bank was already closed for the day. On this the person, who had called Kaushik earlier on the 22nd, called him again and started shouting at him Continue reading