Finance Archives - Page 8 of 9

Difference between Money Market and Capital Market – Money Market Vs Capital Market | Financial Market

November 7, 2022February 3, 2017 by Smirti

Difference between Money Market and Capital Market

Money market is one of the type of financial market where short term securities are traded. Capital market is one the type of financial market where long term securities are traded.

Money Market Vs Capital Market

S.No.	Money Market	Capital Market
1.	Money market is one of the type of financial market where short term securities are traded.	Capital market is one the type of financial market where long term securities are traded.
2.	The securities traded in money market have life less than one year.	The securities traded in capital market have life more than one year.
3.	The securities traded in money market are highly liquid (can be easily converted into cash) as they have maturity period less than one year.	The securities traded in capital market are less liquid (can be easily converted into cash) as they have maturity period more than one year.
4.	The securities traded in money market are unsecured because they are issued without collateral(property or other asset that a borrower offers as a way for a lender to secure the loan.).	The securities traded in capital market are secured because they are issued with collateral(property or other asset that a borrower offers as a way for a lender to secure the loan.).
5.	The money market instruments are Treasury bill, Commercial paper, bank deposit , Certificate of deposit(CD), etc.	The capital market instruments are Common stock ,Preferred Stock, bond, debentures, etc.

Difference Between Primary Market and Secondary Market – Primary Vs Secondary Market | Financial Markets

February 4, 2024January 31, 2017 by Smirti

Difference Between Primary Market and Secondary Market

➥ Primary Market is the marketplace where companies issue securities for the first time.

➥ On the other hand, Secondary Market is the marketplace where the second-hand securities are traded so that the public can buy and sell the securities.

➥ With the help of the issuance of these securities, the companies raise capital. Difference between the primary market and the secondary market is explained below:

Difference between MEC and MEI – MEC Vs MEI | Investment Functions

February 4, 2024January 18, 2017 by Smirti

Difference between MEC and MEI

Marginal Efficiency of Capital (MEC)

Marginal Efficiency of Capital (MEC) is the rate of discount which makes the discounted present value of expected income stream equal to the cost of capital.

MEC was first introduced by J.M Keynes in 1936. According to him, it is an important determinant of autonomous investment.

The marginal efficiency of capital is a key concept in economics that describes the relationship between the production of goods and services and the investment in capital.

The marginal efficiency of capital is used to measure the amount of output produced by an extra unit of investment. The marginal efficiency of capital is important because it helps to understand how an economy grows and how resources are allocated.

The marginal efficiency of capital (MEC) is the increase in output that results from an additional unit of investment.

MEC is determined by the productive capacity of the capital goods available for use and the expected return on investment.

The MEC declines as the amount of capital invested increases, because each successive unit of investment has a lower expected return.

The MEC plays an important role in economic decision-making, because it represents the maximum return that can be expected from an additional unit of investment.

In order to maximize economic growth, firms must invest in projects with a MEC that is greater than the cost of capital.

The MEC can also be used to compare different investment opportunities and determine which one will generate the highest return.

Common Stock Vs Preferred Stock – Difference between Common Stock and Preferred Stock | Finance

November 11, 2022December 10, 2016 by Smirti

Common stock is a security issued by a company that represents the ownership of the company.Preferred stock is hybrid security issued by a company that has combined features of both debt and common stock.

Difference between Merger and Acquisition – Finance | Management Notes

October 11, 2022December 9, 2016 by Smirti

Difference between Merger and Acquisition

Merger is the combination of two or more than two companies maintaining the identity of one of the companies. Acquisition is the process of acquiring the ownership of small business entity by large business entity.

Motives for Holding Cash – Transaction,Precautionary & Speculative Motive | Cash Management

January 11, 2023November 26, 2016 by Smirti

Motives for Holding Cash

Each and every firm needs cash for carrying out different activities like meeting its daily needs(e.g. paying salary, wages, due loans, purchase of raw materials, etc), maintaining a certain level of cash to face the unpredicted fluctuation in cash flows in the future, and holds cash to take advantages of price movement in the markets. Thus, there are mainly three motives for holding cash which is as follows:

Transaction Motive
Precautionary Motive
Speculative Motive
Read more

Factors Affecting Dividend Policy of a Firm – 13 Major Factors Explained | Finance

September 19, 2023September 10, 2016 by Smirti

Dividend Policy

A dividend is the distribution of profit or the portion of net income paid out to shareholders. It is paid to shareholders in cash or stock for making investments and bearing risks.

Dividend policy is simply concerned with determining the portion of a firm’s earnings into dividends and retained earnings in the firm. A firm’s dividend policy is influenced by a large numbers of factors. Some factors affect the number of dividends and some factors affect the types of dividends.

A dividend policy refers to how a company structures its dividend payouts to shareholders. According to some researchers, the dividend policy is irrelevant, in theory, since investors may be able to sell a part of their shares or portfolio when they need cash.

The dividend irrelevance theory holds that dividend payouts have little impact on stock prices. However, whether the dividend policy is relevant or not, it is a source of income for shareholders. A generous dividend policy often benefits company leaders, who are often the largest shareholders.

Dividend policies are viewed by most companies as integral to their corporate strategies. Dividend payments are influenced by many factors, including the amount, timing, and other factors. Dividend policies are divided into three types: the constant dividend policy, the stable dividend policy, and the residual dividend policy.

Agency Problem between Shareholders and Creditors | Financial Management

March 18, 2024September 10, 2016 by Smirti

Agency Problem between Shareholders and Creditors

➦ Agency problem is the conflict of interest between the shareholders and managers, and shareholders and creditors. It may cause difficulty in achieving the goal of shareholder’s wealth maximization.

➦ In the agency problem, Creditors are viewed as principal and the shareholders as the agent .There is conflict of interests between shareholders, through managers, and creditors.

➦ Conflict of interests between shareholders and creditors arises when the managers make decisions for shareholders value by ignoring the interest of creditors.

➦ Since, Creditors provide their capital to the firm at fixed rate of interest for specified period and the firm is authorized to use it for a given time period according to the agreed terms and conditions.

➦ Both shareholders and creditors have claim on assets and earnings of the company. Creditors get priority for receiving their interest and principal repayment.

➦ However, creditors invest their capital to earn a fixed rate of interest and to get the principal paid back upon maturity. Shareholders invest their capital to maximize the market price of their shares.

➦ Creditors are concerned to see the earnings sufficient to cover their fixed interest payment and principal repayment in time. Creditors do not entitle to the extra return from additional risk, but they have to bear the additional risk taken by the company. So, they oppose the high risk.

➦ For example, the managers may decide to invest in a highly risky project. If such a risky project becomes successful, all the benefits go to the shareholders because the creditor will receive only the already fixed rate of return.

➦ However, if the project is unsuccessful, creditors may have to sustain the losses. The managers may repurchase the firm’s outstanding stock by borrowing additional funds to increase the leverage situation.

➦ In such a situation also all the benefits go to the stockholders at the cost of increased risk to the creditors. Thus ,there is conflict of interests between shareholders and creditors.

➦ For instance, imagine a publicly traded company where the shareholders, who own equity in the company, want to see higher returns on their investments.

➦ To achieve this, the shareholders may pressure the company’s management to pursue aggressive expansion strategies or undertake projects with high potential returns but also high levels of risk.

Importance of Capital Budgeting – Financial Management | Management Notes

December 16, 2021September 10, 2016 by Smirti

Importance of Capital Budgeting

What is the concept of capital budgeting?

Capital Budgeting is the long term investment planning, analyzing, and decoding process used to evaluate and select capital expenditures consistent with the firm’s goal of owner wealth maximization. Capital expenditures are the long term investments made to expand, replace, or renew fixed assets or to obtain some other less tangible benefit.

Capital Budgeting Process

The capital budgeting process contains five distinct but interrelated steps beginning with proposal generation, followed by review and analysis, decision making, implementation and follow up.

Capital Budgeting or investment decision requires special attention because the following reason can be explained in the following manner:

Why capital budgeting is needed?

1. Growth

A firm’s decision to invest in long term assets has a decisive influence on the rate and direction of its growth. A wrong decision can prove disastrous for the continued survival of the firm. On the other hand, inadequate investment in the asset would make it difficult for the firm to compete successfully and maintain its market share.

Agency Problem between Shareholders and Managers | Financial Management

March 17, 2024September 10, 2016 by Smirti

Agency Problem between Shareholders and Managers

➦ Agency problem is the conflict of interest between the shareholders and managers, and shareholders and creditor.

➦ It may cause difficulty in achieving the goal of shareholder’s wealth maximization.

Agency Problem between Shareholders and Managers:

➦ Shareholders can be viewed as active Principals and Managers can be viewed as passive Agents.

➦ Shareholders are the real owners of the company however they cannot actively manage the company themselves as they are in large number and dispersed in various geographical locations and , also they may not have necessary skills ,expertise and experiences to manage a company.

➦ Therefore, they elect a BOD from among themselves for managing the firm. BOD delegates its authority to CEO who is responsible for the management of a company.

➦ Managers are concerned with their personal wealth, prestige, salary, job security, fringe benefits, etc.

➦ It might result potential loss of wealth for the shareholders resulting in the conflict between shareholders and them. Managers may tend to compromise between their own satisfactions in maximizing of shareholder wealth.

➦ The agency problem between then occurs because the management may tend to act for achieving his/her own goals at the expense of other owners.

➦ Since, Managers have much more information about the company they can manipulate the company’s information for their own benefit.

➦ Managers may not work hard for maximizing shareholder’s wealth because only less of the wealth will be given to them.

➦ Managers may sometime tend to give away the corporate earning to their favorite charitable institutions for their glory and personal satisfaction.

➦ Managers may also practice the poison pill( practice where management poses the company as unattractive to be taken over) and greenmail( practice of repurchasing shares from the person trying to gain control of the firm) for preventing hostile takeover.

➦ The agency problem between shareholders and managers arises due to the conflicting interests between these two groups within a corporation.

➦ Shareholders, who own the company, seek to maximize their wealth through the appreciation of stock value and dividends, while managers, hired to run the company, may prioritize their own interests or personal goals over those of the shareholders.

➦ This misalignment of interests can lead to agency costs, such as managerial opportunism, where managers may pursue actions that benefit themselves at the expense of shareholders, or moral hazard, where managers take excessive risks knowing that shareholders bear the consequences.

➦ To mitigate the agency problem, various mechanisms such as executive compensation structures, independent boards of directors, and shareholder activism are employed to align the interests of managers with those of shareholders, ensuring that managerial decisions are made in the best interest of the company’s stakeholders as a whole.

Goals of Financial Management – Profit Maximization and Value Maximization | Financial Management

March 17, 2024September 10, 2016 by Smirti

Financial Management

➦ In any organization, financial management is a vital activity. In order to achieve organizational goals and objectives, it involves planning, organizing, controlling, and monitoring financial resources.

➦ It is a useful method for controlling the financial activities of an organization, including the procurement of funds, the utilization of funds, accounting, payments, risk assessments, and so on.

➦ In other words, Financial Management refers to the application of management principles to a business’s financial assets.

➦ In order for an organization to function efficiently, its finances need to be managed correctly to ensure quality fuel and regular service. An organization’s growth and development might be hampered if finances are not properly handled.

Difference between Cumulative and Non-Cumulative Voting Rights | Financial Management

March 15, 2024September 7, 2016 by Smirti

Cumulative and Non-Cumulative Voting Rights

Cumulative Voting

➦ Cumulative voting is a minority voting system used by organizations that allow shareholders to vote proportionately to the number of shares they hold.

➦ This process usually benefits minority shareholders by giving them the option to focus all of their attention on a single candidate or decision point.

➦ Cumulative voting allows shareholders to apply all votes to oneperson or to divide them up between candidates standing in the election of BOD which gives individual stockholders greater influence in shaping the board.In cumulative voting system there is accumulation of vote.

Noncumulative voting

➦ Noncumulative voting is a majority voting system in which a shareholder can only vote up to the number of shares she/he owns for a single candidate during the board elections.

➦ In non-cumulative voting system there is no accumulation of vote. The result is that a majority shareholder will elect the entire board of directors.

➦ For example, Suppose four people stand for the position of directors in the election and you hold 500 shares (with one vote per share), under the non-cumulative method you can vote a maximum of 500 shares for each one candidate.

➦ With cumulative voting, you are afforded the 2,000 votes (giving you 2,000 votes total—500 votes per each of the four candidates)from the start and you can choose to vote all 2,000 votes to first candidate, 1,000 each to second candidates, or otherwise divide your votes whichever way you wanted.