Break even period, Financial Management

Assignment Help:

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.


Related Discussions:- Break even period

calculate the value of the bond, a.) A bond of Rs. 1000 value carries a co...

a.) A bond of Rs. 1000 value carries a coupon rate of 10% and has a maturity period of 6 years. Interest is payable semi-annually. If the required rate of return is 12%, calculate

Capital budget relate to pro forma financial statements, Explain how the ca...

Explain how the cash budget and the capital budget relate to pro forma financial statements. The cash budget demonstrates the projected flow of cash in and out of the firm fo

Problem 1, You work for a small, for-profit health system. Your system is i...

You work for a small, for-profit health system. Your system is interested in acquiring a Critical Access Hospital (CAH) at a price of $65,000,000. The purchase would be made from r

What are the failure of mergers and takeovers, Failure of mergers and tak...

Failure of mergers and takeovers Failure of mergers and takeovers Poor strategic plan will result in slow or failed integration. Integra

Common-size analysis, Common-size Analysis • Prepare a Common-size Analy...

Common-size Analysis • Prepare a Common-size Analysis for the Balance Sheet and Income Statement • This should include about 12 accounts in the Balance Sheet and about 10 Inc

What is the function of dividend policy decision, Q. What is the function o...

Q. What is the function of Dividend policy decision? Dividend policy decision: the third major decision of the financial management of the decision related to the dividend poli

Setting budget goals and objectives, Setting Budget Goals and Objectives: ...

Setting Budget Goals and Objectives: Having collected and analysed all relevant information, and made general forecasts as to the key areas of concern / opportunity and special

Valuation an option-free bond with the tree, Let us construct a binom...

Let us construct a binomial interest rate tree for a 5.5% option free bond taking Table 3 as the binomial interest rate tree. Table 1 shows the various values in

Investment decision and cost of capital, INVESTMENT DECISION AND COST OF CA...

INVESTMENT DECISION AND COST OF CAPITAL In Finance, investment decision is disclose the allocation of funds in fixed assets or long term. This decision is also known as capita

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd