FinancialManagementPro.com

Stock Splits

Stock split is a corporate action usually taken when the management of a company believes that the stock price is too high for investors. There are several reasons why a split is made ...

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Stock Dividends

Stock dividends payout does not cause a cash outflow. It is the distribution of additional shares among current stockholders. This may happen when management of a corporation does not ...

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Tax Preference Theory

The tax preference theory of dividends was developed by Robert H. Litzenberger and Krishna Ramaswamy. This theory claims that dividend policy affects investor behavior due to the difference in ...

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Bird-in-hand Theory

The bird-in-hand theory of dividend policy were developed by Myron Gordon and John Lintner in response to the dividends irrelevance theory by Modigliani and Miller. The last one states that dividend policy has ...

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Dividend Irrelevance Theory

The dividend irrelevance theory was created by Modigliani and Miller in 1961. The authors concluded that dividend policy has no effect on the market value of a company or its capital structure ...

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Dividend Payment Procedures and Dates

There are four major dates when a company pays out cash dividends. Let’s take a look at dividend payment procedures using an example ...

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Trade Credit

Trade credit is the most common source of spontaneous short-term finance for a business. In such an agreement, the seller is the lender, allowing the buyer to pay at a later date than ...

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Effective Interest Rate

The concept of effective interest rate is widely used in finance to assess the interest expense of debt financing or interest income for financial assets. Moreover, IFRS require ...

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Miller-Orr Model

The Miller-Orr model of cash management is developed for businesses with uncertain cash inflows and outflows. This approach allows lower and upper limits of cash balance to be set ...

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Cash Budget

A cash budget is a financial statement with itemized projected cash inflows and cash outflows, and a projected cash balance at the end of a budget period. It is necessary to know in advance about any ...

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ABC Analysis of Inventory

ABC analysis is a technique of categorization based on the Pareto principle. This technique is used in inventory management to categorize inventory in terms of annual consumption value ...

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Factoring of Accounts Receivable

Factoring of accounts receivables is a way of raising funds to meet emerging working capital needs. A business sells its accounts receivable to a financing company on a recourse or nonrecourse basis at some discount ...

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Cash Management

Cash and marketable securities management is the primary objective of the treasury and financial department. This includes financing working capital needs, managing debts, paying vendor bills ...

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Cash Conversion Cycle

The cash conversion cycle measures the period of time in days from the moment inventories are paid until the moment accounts receivable is collected. In other words, it is the duration of working capital turnover ...

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Operating Cycle

An operating cycle is the period of time from the moment raw materials are purchased to when cash is received from customers. This financial ratio measures the performance of working capital management ...

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Working Capital Financing Strategies

Three basic strategies are used in financing working capital. They differ in the proportion of long-term and short-term financing used as a source for permanent and temporary working capital ...

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Covariance of Returns

In statistics, covariance is a metric used to measure how one random variable moves in relation to another random variable. In investment, covariance of returns measures how the rate of return on one asset ...

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Standard Deviation of Portfolio

Standard deviation of portfolio return measures the variability of the expected rate of return of a portfolio. Its value depends on three important determinants ...

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Standard Deviation of Return

Standard deviation is a metric used in statistics to estimate the extent by which a random variable varies from its mean. In investing, standard deviation of return is used as a measure of risk ...

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Variance of Return

Variance is a metric used in statistics to estimate the squared deviation of a random variable from its mean value. In portfolio theory, the variance of return is the measure of risk inherent in investing in a single asset or portfolio ...

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Expected Rate of Return

The expected rate of return is a percentage return expected to be earned by an investor during a set period of time, for example, year, quarter, or month. In other words, it is a percentage by which the value of investments ...

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Baumol-Tobin Model

The Baumol-Tobin model is used in corporate finance as a cash management technique to help determine the cash balance that grants the minimum amount of transaction cost and opportunity cost ...

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Safety Stock

A company holds safety stock to mitigate the risk of running out of stock due to an unexpected increase in demand rate and/or lead time. In other words, it is an extra quantity of stock ...

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Reorder Point

The reorder point or reorder level is a stock balance when a new purchase order should be issued to replenish inventory stock. In other words, it is the amount of inventory to be used during ...

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Economic order quantity, EOQ

Economic order quantity or EOQ model is the equation that helps compute order quantity of inventory accompanied by the minimum total holding and ordering costs ...

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Working Capital

Working capital is a financial concept describing the difference between current assets and current liabilities of a business. If current liabilities are greater than current assets, a business has a deficit of ...

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Return on Assets, ROA

Return on assets or ROA is a profitability ratio measuring the efficiency of a company’s management to generate net income by its total assets. In other words, it shows the dollar amount of net income ...

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EBITDA Coverage Ratio

EBITDA coverage ratio gauges the ability of a company to meet its debt obligations and leases (both capital and operating). In other words, it shows whether or not a company is able to pay interest and principal on ...

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Asset Turnover Ratio

The asset turnover ratio refers to the group of efficiency ratios gauging the ability of a company to generate sales using its assets. In other words, it shows how much in total dollars of sales ...

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