Capital Budgeting – Procedure & Decision Process

Capital budgeting is the process by which the financial manager decides whether to invest in specific capital projects or assets. In some situations, the process may entail in acquiring assets that are completely new to the firm. In other situations, it may mean replacing an existing obsolete asset to maintain efficiency. During the capital budgeting … Continue reading Capital Budgeting – Procedure & Decision Process

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Cost of Capital WACC — Formula & Calculation

The cost of capital is the expected return that is required on investments to compensate you for the required risk. It represents the discount rate that should be used for capital budgeting calculations. The cost of capital is generally calculated on a weighted average basis (WACC). It is alternatively referred to as the opportunity cost … Continue reading Cost of Capital WACC — Formula & Calculation

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CAPM – Capital Asset Pricing Model

In an efficient securities market, prices of securities, such as stocks, always fully reflect all publicly available information. This raises the question “What should the price be?” The well-known Sharpe-Lintner capital asset pricing model (CAPM) provides an answer. According to the model a share’s current market price will be such that: Expected return on the … Continue reading CAPM – Capital Asset Pricing Model

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Efficient Markets Hypothesis – Theory & Definition

Definition An efficient securities market is one where the prices of securities traded on that market at all times “properly reflect” all information that is publicly known about those securities. Noteworthy Points of the Theory First, market prices are efficient with respect to publicly known information. The possibility, therefore, of inside information is not ruled … Continue reading Efficient Markets Hypothesis – Theory & Definition

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Simple Interest – Definition and Calculation

When we borrow money we are expected to pay for using it – this is called interest. There are three components to calculate simple interest: principal (the amount of money borrowed), interest rate and time. Formula for calculating simple interest: I = Prt Where, I = interest P = principal r = interest rate (per … Continue reading Simple Interest – Definition and Calculation

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