Initial Public Offering (IPO) Phases In an Initial Public Offering (IPO), the issuer obtains the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), the best offering price and the time to bring it to market. Any IPO process goes through the following stages of transformation: The pre-IPO transformation phase can be considered to be a restructuring phase where a company starts the groundwork toward becoming a publicly-traded company. Furthermore, companies should re-examine their organizational processes and policies and make necessary changes to enhance the company’s corporate governance and transparency. Most importantly, the company needs to develop an effective growth and business strategy that can persuade potential investors the company is profitable and can become even more profitable. The IPO transaction phase usually takes place right before the shares are sold and involves achieving goals that would enhance the optimal initial Continue reading
Financial Management Concepts
Depreciation – Definition, Methods, and Tax Implications
Depreciation is a cost estimation method for accounting for the worth of a long-term asset over its useful life. Depreciation is used to spread the cost of a tangible asset over the accounting periods in which the asset is used. There are some questions surrounding this topic that are essential to explore. For instance, what are the tax implications of depreciation? What are the different depreciation methods, and how can they be used to calculate the amount? What are the best practices for managing depreciation? How does depreciation help to ensure a company’s financial health? Each of these questions will be explored in more detail to understand the concept of depreciation fully. Since antiquity, depreciation has been utilized for cost apportionment. Initially, the idea was developed by the Greek philosopher Aristotle, who believed that the value of an asset declined over time. By the 19th century, Italian economist Vilfredo Pareto Continue reading
Corporate Investment Decisions – Meaning and Stages
In order to succeed in a competitive market, corporations need to pay much attention to their investment decisions to gain benefits and profits. The process of making effective decisions involves several steps, and it needs to be discussed in detail along with a list of options that are available to corporations for their investment. The purpose of this article is to provide an explanation of how the majority of corporations make specific investment decisions to add to their profitability and competitive advantage. The first step in the decision-making process related to investing in the analysis of a current situation with the help of certain tools, such as the cash flow analysis and the analysis of the cost of capital. These tools are important to indicate the current position of a corporation in the market, evaluate its attractiveness to potential investors, and influence its own investing decisions. The second step in Continue reading
Accounting Methods Used in Financial Statement Preparation
First of all, what is the primary objective of financial statement? Financial statement is to provide information about financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions – stated by International Accounting Standards Board (IASB). For providing information of financial statement, there are two accounting methods for companies to report their financial statement. Cash accounting and accrual accounting both are the main method to prepare the financial statement. Cash basis accounting is a very basic form of accounting. Revenue is recorded only when the cash is received, and an expense is recorded only when cash is paid. Preparing an income statement under the cash basis of accounting is prohibited under generally accepted accounting principles. For example, when a payment is received for the sales of product or services and the revenue is also recorded the Continue reading
Risks Associated with Derivatives
Although derivatives are legitimate and valuable tools for hedging risks, like all financial instruments they create risks that must be managed. Warren Buffett, one of the world’s most wise investors, states that “derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.” On one hand derivatives neutralize risks while on the other hand they create risks. In fact there are certain risks inherent in derivatives. Derivatives can be dangerous if not managed properly. Numerous financial disasters such as Enron can be related to the mismanagement of derivatives. In the 1990s, Procter & Gamble lost $157 million in a currency speculation involving dollars and German Marks, Gibson Greetings lost $20 million and Long-Term Capital Management, a hedge fund, lost $4 billion with currency and interest-rate derivatives. It is key to consider that it has not been the use of derivatives as a tool which has Continue reading
An Overview of Hedge Fund Strategies or Hedging Techniques
Hedge funds are pools of investment that invest in almost any opportunity in any market where they foresee impressive gains at reduced risk. Hedging refers to implementing strategies that manage or protect against an identified risk exposure. They take leveraged positions in publicly traded equity, debt, foreign exchange and derivatives. The primary aim of most hedge funds is to reduce volatility and risk while attempting to preserve capital and deliver positive returns under all market conditions. Derivatives provide institutions the opportunity to break financial risks into smaller components and then to buy or sell those components to manage risk. Hedge funds hold a number of assets; they use derivatives to protect against the adverse price movement of these assets. Hedge funds play more of the role of speculators than of hedgers. They use derivatives when buying and selling assets and by putting long-short positions, they seek to hedge themselves against Continue reading