Economic Value
Added (EVA)
EVA = [Net
Operating Profit after Tax (NOPAT)] – [Capital Employed x Weighted Average Cost
of Capital]
NOPAT = EBIT (1-Tax
Rate)
Weighted Average
Cost of Capital (WACC) = KeWe + KdWd
+ KrWr
Capital Employed =
Equity (Equity +Preference Share Capital) + Reserves + Long Term Debt
Positive EVA =
Wealth Creation
Negative EVA =
Wealth Destruction
EVA is the excess
amount earned for Equity Shareholder over and above equity shareholder’s expectation.
Maximum Dividend a
company can pay = EVA
If company pays
dividend more than EVA then value of firm will start declining.
Operating Leverage (OL)
= Contribution/EBIT
Finance
Leverage (FL) = EBIT/EBT
Combined Leverage =
OL x FL
Factoring
Factoring is a
financial service which includes managing of accounts, collection service and advance
against Debtors. They charge commission for their services know as factoring Commission.
Types of
Factoring
Recourse
Factoring
Factor doesn’t take
the responsibility of bad debts, since they charge commission at lower rate.
Non – Recourse
Factoring
Factor takes the
responsibility of bad debts, since they charge commission at higher rate.
Cost due to
Factoring
Factoring
Commission
Interest on Advance
Saving due to
Factoring
Administration Cost
saved.
Bad Debts Avoided.
If cash discount is
given in question then this will also form part of saving.
If data of cost of
fund is given in question then saving due to reduction cost due fund blocked
will also form part of saving.
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