In old times, the traditional approach of companies was to maximize the owner’s profit. Modern approach puts more emphasis on Shareholder Wealth Maximization rather than owner profit maximization. This includes increasing the earnings per share (EPS) of every shareholder so that their net worth is maximized. Wealth increase is equal to what gross present worth in needed for raising profits in the future. This value needs to be discounted as per the time frame to found out the annualized rate of return for the shareholder. In Shareholder Wealth Maximization, it places priority before any other objective for the organization. Any action which has positive effective on Shareholder Wealth Maximization needs to be given priority. In any capitalistic society, the goal of business should be Shareholder Wealth Maximization as mostly the ownership of goods and services is by individuals, since, they own all the means so that they can make money. Continue reading
Financial Concepts
Labor Cost Control – Meaning and Need
Labor cost covers one of the major portion of the total cost of a product or job. It may increase unnecessarily due to inefficiency of workers, wastage of materials by workers, idle time, unusual overtime work and high labor turnover. Hence, the management should devise effective techniques for controlling labor cost to ensure maximum outputs of better quality at low cost through proper utilization of the labor force. Basically, management is concerned with controlling labor cost. Labor cost control involves such systems, procedures, techniques and tools used by the management in order to keep the labor cost of the product or job as minimum as possible. Labor cost control consists of a number of such regular activities which are carried on by various departments of the organization in a coordinated manner to ensure the availability of the best employees and their optimum utilization. It is the system followed by the Continue reading
Structure and Trading System in Secondary Market
The securities market has essentially three categories of participants, viz., the issuer of securities, investors in securities and the intermediaries. The issuers are the borrowers or deficit-units, who issue securities to raise funds for their business activities. The investors, who are surplus savers, deploy their savings by subscribing to these securities and issue funds for the business activities. The intermediaries are the agents who match the needs of users and suppliers of funds for a commission. The secondary market or the stock exchange system in India is represented by 23 stock exchanges including the National Stock Exchange of India(NSE), the Over The Counter Exchange of India, the Inter connected Stock Exchange of India and 20 other stock exchanges located at different places. However at present, trades take place only at NSE and BSE and other stock exchanges have become redundant. The operations of stock exchanges are regulated, supervised and controlled Continue reading
An Overview of Electronic Cash
The World is moving rapidly with vastly changing technological developments and innovations. We are currently experiencing an era, where everything is getting automated and digitalized. Along with this technological transition, international monetary system is one significant aspect that is getting transferred from its current state of paper based monetary system to electronic monetary/cash system. According to the 1994 report of European Central bank, electronic cash can be defined as an electronic store of monetary value on a technical device that may be widely used for making payments to undertakings other than the issuer without necessarily involving bank accounts in the transaction, but acting as a prepaid bearer instrument. Like the serial number on general dollar bills, electronic cash issued by a bank or any other institution will also consist a unique number and will represent a specified value of real money. Hence with the current accelerated phase of changes and Continue reading
Future Flow Securitization
Securitization of the future flow-backed receivables is a new phenomenon in developing economies. Future Flow Securitization has grown in emerging markets in response to finding lower cost funding instrument by investment grade firms in the emerging market economies where their abilities were hampered by sovereign rate ceiling. While many of these companies historically relied on bank loans, or straight debts syndicated by major foreign banks in the past, rising volatility of interest rates and foreign exchange rates as well as reduced risk tolerance of major lenders have pushed these institutions (sovereign and private companies) toward an alternative vehicle such as future flow securitization. Future flows, have successfully mitigated a variety of the risks associated with emerging-market investments, and consistently remained the most viable type of rated transactions for funding in emerging-market countries. Future Flow Securitization Model Future Flow Securitization involves the borrowing entity to sell future receivables that would have Continue reading
Strategies to Resolve the Principal Agent Problem
The principal agent problem refers to difficulties of motivating one party the agent to act for the best interest of the other party the principal. In a company, the owners of the assets (the stockholder) are the principals and the managers of the company are the agents. The stockholders of the company authorize the managers to manage and use their resources to make profit for the stockholders. The cause of the principal agent problem is that the information asymmetry between the principal and the agent and the principal and agent have different interests. Generally, the Agents are the managers of the resources and have more information than the principals. In a company, the managers of the company will have more information about the company than the stockholders of the company. The agents may use this asymmetric information to get interest for themselves rather than the principals. In general, the principal Continue reading