Break even period, Financial Management

It is also important to compare the returns from the equity stock and the bond to determine the profitability of both investments. We have seen above that the dividend paid on equity is Rs.0.75. That is, a current yield of 0.75/11 = 0.06818 or 6.82%. The bond, at 10%, will yield 10/117 = 0.08547 or 8.55%.

We note that holding the bond gives us a better return than the outright purchase of the common stock. Under these conditions, we try to calculate the number of years required to recover the conversion premium, which results due to different cash flows from the instruments. This period is referred to as the Break Even Period. It is calculated by the formula given below.

         Break Even Period = 1160_break even period.png

Substituting this with values from our example, we have,

         Break Even Period =  2365_break even period1.png  = 2.8 years.

Till now we have been looking at a well-known model called the "Traditional Valuation Model". In a more systematic manner,

         Annual cash flow differential   =  Face amount x Coupon rate - Conversion value x Dividend yield,

and the payback period is,

         Payback period = 501_break even period2.png

We should notice that this method is only an adaptation of the method used in capital budgeting and has its own drawbacks.

Posted Date: 9/10/2012 7:58:15 AM | Location : United States







Related Discussions:- Break even period, Assignment Help, Ask Question on Break even period, Get Answer, Expert's Help, Break even period Discussions

Write discussion on Break even period
Your posts are moderated
Related Questions
Special bond structures are the municipal securities bearing special security structures. They are of two types - insured bonds and pre-refunded bonds.

Explain and compare the costs of hedging via the forward contract and the options contract. Answer: There is no up-front cost of hedging through forward contracts. Though, in t

It is a bond that does not give periodic interest payments. In spite of that, interest is added to the principal balance of the bond and is either paid at maturity or, at some poin

As you checked the Answer Key to Question 6 in the Mastery Check from this lesson you may have noted that each year's net cash flows are calculated by adding depreciation back to n

If a credit manager experience no bad debt losses over the past year. Would this be an indication of proper credit management? Why or why not

Determine the meaning of Reportable segments Reportable  segments  are  operating  segments  or  aggregations  of  operating  segments  which meet specified criteria(core princ

Working and function of stock exchange

a) Social marketing is the use of normal marketing methods to achieve the benefits of social change, such as informing the public about the harm of under-age drinking, rather than

The personnel department of a firm is entrusted with the responsibility of recruitment, training and placement of the staff for the firm. The department is also required to critica

What does it mean when the U.S. dollar weakens in the foreign exchange market? While the U.S. dollar weakens in the foreign exchange market one U.S. dollar buys smaller amount un