Finance Concepts Assignment Example | Topics and Well Written Essays - 1000 words

Finance Concepts - appointment ExampleIf the estimated life of this project is 5 years and the Required Rate of Return is 10%, indeed we can also calculate the NPV of this project. If the NPV is also a positive value then we can safely estimate that this project will carry a good return, and the initial investment would be cover in 5 years. (Shim & Siegel, 2000). 2. Whenever one wants to finance a business, he can go for either debt or equity financing. Debt Financing carries lots of advantages and disadvantages. The major advantage of this form of financing is that you do not abide the ownership of your political party. The lender also does not have any sort of share in the approaching business profits. Moreover, the interest on debt is deductible on the taxs returns, hence reducing the unfeigned cost of impart to the keep company. Finally, in the case of debt financing the company is not entitled to send their one-year reports to various stakeholders. However there is alway s another side of a coin. Debt Financing carries the disadvantage of at being repaid at some point in prison term. The interest cost can be real risky for a company, especially at the times of financial crisis. Other than that the collateral the company pledges against the loan can put extra pressure on the owner of a small venture. There is a reason why companies choose to invest in stock rather than bonds. The investment in bonds carries let down returns than stocks. Even though it is less risky, the return on stocks can be much more appealing. Investors can, in certain situations lose money on bonds, if they sell a bond when the price is lower from when they purchased it. The superiorer(prenominal) inflation rates over the investment return on bonds will hurt the purchasing magnate of the money the investors have (Petch, n.d.). 3. In the field of finance there is an important concept of risk-return trade-off. There is a general idea that prevails, the higher the risk the gre ater the return would be for an investment. The balance of the risk-return trade-offs, is hence a key factor in designing a proper financial and investment plan. Let us take an example of investment in stocks. In the case of a speculative stock because of its high risk, as an investor, you will dwell a higher return. The same is the case with the working capital management. If you economize a lower inventory, there is a risk of running out of stock and hence you expect a larger return out of it (Shim & Siegel, 2000). 4. In finance, a Beta measures how volatile any protective cover is to the market average. In layman terms, it measures the return of a security in a certain time period in relation to the overall market. Let us take an example, if a company has a beta of 2.0 in ascribable time, this would imagine that if the stock market would increase by 10%, our companys stock will increase twice fold i.e. by 20% and vice versa. If the company has a 0 beta that means it is not a ffected by the market. A 0.5 beta would mean the companys stock is half as volatile as the market, while a 1 beta would show that the company is as volatile as the market (Shim & Siegel, 2000). 5. When a risk occurs due to non-probabilistic events and not by pure chance, it is classified as