Break even period, Financial Management

Assignment Help:

Break Even Period:

It is also important to compare the returns from the equity stock and the bond to determine the profitability of both investments. Assume that the dividend paid on equity we have seen above 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 = Conversion premium/Interest Income

Break Even Period = = 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

 


Related Discussions:- Break even period

Yield curve strategies, Yield curve strategies take into account the ...

Yield curve strategies take into account the distribution of the maturities of the bonds of the portfolio in order to take advantage of the forecasted movements o

Calculate the annual interest , Reston, Inc., has asked your corporation, P...

Reston, Inc., has asked your corporation, Pruro, Inc., for financial assistance. As a long-time customer of Reston, your firm has decided to give that assistance. The question you

Financial maket, knowledge of financial market is power discuss

knowledge of financial market is power discuss

Monte-carlo simulation, Monte-Carlo Simulation Let us, for a shortwhil...

Monte-Carlo Simulation Let us, for a shortwhile, leave the illustration for determining the price and consider a simpler illustration for understanding the Monte-Carlo method

Fiancial management, Ashok is to receive an amount of Rs. 15,00,000 from hi...

Ashok is to receive an amount of Rs. 15,00,000 from his relative after 3 years. He wants to buy a house for which he wants the money to be paid now. His relative had already invest

In how many area ratios are grouped, In how many area ratios are grouped ...

In how many area ratios are grouped Ratios can be grouped into 3 main areas: 1 Performance - how well business has done (profitability) 2 Position - short term standing

How are the hibor, Q. How are the HIBOR, HSI and HSI futures related? T...

Q. How are the HIBOR, HSI and HSI futures related? The HIBOR and HSI are contrariwise related. So futures on HIBOR and HSI are as well inversely related. Display

Beta, what is the value of beta for this fund ? If the benchmark index for ...

what is the value of beta for this fund ? If the benchmark index for this mutual fund increased by 11.00% during the period covered by beta measure, what was the rate of return for

Engagement completion document, Engagement Completion Document - A document...

Engagement Completion Document - A document whereby AUDITOR identifies all significant findings or issues. Document must be as specific as essential in the circumstances for a revi

Find out the value of firm according to the mm approach, Example: - Two fir...

Example: - Two firm U as well as L is identical in every respect except that U is unlevered and L is levered. L has Rs. 20Lakh of 8% debt outstanding. The net operating income of b

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