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

Performance budget, Performance budget: it involves evaluation of the perf...

Performance budget: it involves evaluation of the performance of the organization in the context of both overall and specific objectives of the organization. As per the National I

What is profit maximisation criterion, Profit maximisation criterion P...

Profit maximisation criterion Profit maximisation criterion is unsuitable and inappropriate as an operational objective of financing, investment and dividend decisions of a fi

Foreign exchange - maximum loss, Q. Foreign exchange - Maximum loss? Fr...

Q. Foreign exchange - Maximum loss? From Marton's point of view an adverse outcome is depreciation of the dollar against sterling as this lowers its income when converted into

Working capital cycle, Q. Working capital cycle? In a manufacturing con...

Q. Working capital cycle? In a manufacturing concern the working capital cycle is start with the purchase of the raw material and ends with the realization of the cash from the

Cash flow duration, Cash flow duration, like effective duration, cons...

Cash flow duration, like effective duration, considers the change in the cash flow due to prepayment with the change in the interest rate. In effective duration,

Define policy formulation - accounts receivable management, Q. Define Polic...

Q. Define Policy formulation - accounts receivable management This is concerned with set up the framework within which management of accounts receivable in an individual compan

What do you mean by a hedge fund, Q. What do you mean by a Hedge Fund? ...

Q. What do you mean by a Hedge Fund? A Hedge Fund is a fund established by one or else several partners with net worth of at least $1 million (although this maybe falling). It

Brixton plans to sell the applicable computer, Brixton Products is consider...

Brixton Products is considering the purchase of a new $520,000 computer-based entry order system.  The cost of the system will be depreciated on a straight-line basis over its five

Explain exchange rate risk, Explain Exchange Rate Risk Exchange-rate ri...

Explain Exchange Rate Risk Exchange-rate risk denotes to the risk the swap bank faces from fluctuating exchange rates throughout the time it takes the bank to lay off a swap it

Forms of bank finance, Q. Forms of Bank Finance? A firm can draw funds ...

Q. Forms of Bank Finance? A firm can draw funds from a bank within the maximum credit limit sanctioned. It can draw funds in the following forms: 1) Overdraft 2) Cash Cre

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