MM Irrelevance proposition – Modigliani and Miller Approach | Capital Structure Theories

MM Irrelevance proposition

MM Irrelevance proposition

The relationship between leverage and the cost of debt capital was discussed for the first time by Franco Modigliani and Merton Miller in 1958. In the absence of taxes, Modigliani and Miller (MM) argue that a firm’s market value and the cost of capital remain unchanged. Based on MM’s analysis, a firm’s market value is determined by capitalizing its expected return at an appropriate capitalization rate regardless of its capital structure.

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Sinking Fund – Meaning, Formula , Advantages and Disadvantages | Financial Management

Sinking Fund

Sinking Fund Meaning

Sinking funds are funds designed to pay off debts that have been created and set up specifically for that purpose. A certain amount of money is set aside regularly in the account and is used only for that purpose. It is often used by corporations to deposit money for bonds and to buy back issued bonds or parts of bonds before maturity. Moreover, the fund helps convince investors that the issuer won’t default on payments.

An effective sinking fund is meant to make it easier to pay off debt and to prevent defaults by having a sufficient amount of money to pay off the debt. Despite the fact that most bonds take several years to mature, it is always more convenient and easier to be able to reduce the principal amount before the maturity date, therefore lowering credit risk.

Sinking funds are well known to many people since even school children understand how important it is to save money for something that they want to own or purchase. During the school year, a class that wants to go to the zoo at the end can create a sinking fund that will grow toward the end of the year and can be used to pay for the field trip.

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Kathmandu Banking Office – Departments of Nepal Rastra Bank | Central Bank of Nepal

Kathmandu Banking Office

Kathmandu Banking Office | Departments of Nepal Rastra Bank | Central Bank of Nepal Kathmandu Banking Office   Kathmandu Banking Office is the central office of Nepal Rastra Bank. Here are all the government accounts are handled. The management of foreign debt of domestic debt helps the government raise funds and make payments. Foreign exchange … Read more

Liquidity Risk – Risks in Commercial Banks | Financial Management

Liquidity Risk

Liquidity Risk 

Liquidity determines whether an asset can be sold in the market within a reasonable timeframe without losing its value. Liquidity risk describes the risk associated with the inability to sell an investment quickly in cash. The liquidity risk will emerge when the intermediary has assets that cannot be converted into liquid funds quickly and hence requires the banks to make the payments. An unexpected withdrawal of funds or loss of insurance coverage may trigger a situation like this. 

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Interest Rate Risk – Risks in Commercial Banks | Financial Management

Interest Rate Risk

Interest Rate Risk

Interest rate risk is another type of risk that must be managed. A rise in interest rates may cause a commercial bank’s liabilities to exceed its assets by an unexpected amount. Essentially, this risk arises from the relationship between the interest rate on assets (return) and the interest costs or charges on liabilities. The spread between these rates directly affects the profitability of a commercial bank. The goal of commercial banks is to have a wide spread in which the return on assets exceeds the cost of liabilities.

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Default Risk – Risks in Commercial Banks | Financial Management

Default Risk

Default Risk

Default risk refers to the risk that the deficit spending units (DSUs) will be unable to meet the obligations they have agreed to under the liability they have sold. In other words, it deals with security issuers or the borrower’s failure to fulfill its obligations. As a result, it is closely related to the financial condition of the firm. An investor who invests in a company that defaults may lose all or part of their original investment. If the DSU defaults, the intermediary, whether it is a bank, a mutual fund, an insurance company, is exposed to the risk of default.

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Inventory Financing – Methods of Inventory Financing | Short Term Financing

Inventory Financing

Inventory Financing | Methods of Inventory Financing | Short Term Financing | Corporate Finance Inventory Financing Inventory financing is the process of obtaining short-term funds using inventories of the firm as collateral. There are mainly three types of inventories. They are finished goods, work-in-process, and raw materials. Finished goods and raw materials are more marketable … Read more