3. The concept of time value of money. Real and future cost of capital.
Time Value of Money (TVM) is an important concept in financial management. It can be used to compare investment alternatives and to solve problems involving loans, mortgages, leases, savings, and annuities.
TVM is based on the concept that a dollar that you have today is worth more than the promise or expectation that you will receive a dollar in the future. Money that you hold today is worth more because you can invest it and earn interest. After all, you should receive some compensation for foregoing spending.
For instance, you can invest your dollar for one year at a 6% annual interest rate and accumulate $1.06 at the end of the year. You can say that the future value of the dollar is $1.06 given a 6% interest rate and a one-year period. It follows that the present value of the $1.06 you expect to receive in one year is only $1.
Present Value is an amount today that is equivalent to a future payment, or series of payments, that has been discounted by an appropriate interest rate. The future amount can be a single sum that will be received at the end of the last period, as a series of equally-spaced payments (an annuity), or both. Since money has time value, the present value of a promised future amount is worth less the longer you have to wait to receive it.
Future Value is the amount of money that an investment with a fixed, compounded interest rate will grow to by some future date. The investment can be a single sum deposited at the beginning of the first period, a series of equally-spaced payments (an annuity), or both. Since money has time value, we naturally expect the future value to be greater than the present value. The difference between the two depends on the number of compounding periods involved and the going interest rate.
The concept of fixed capital, its structure and role in the organization of the finance corporation.
Assets or capital investments that are needed to start up and conduct business, even at a minimal stage. These assets are considered fixed in that they are not used up in the actual production of a good or service, but have a reusable value. Fixed-capital investments are typically depreciated on the company's accounting statements over a long period of time, up to 20 years or more.
Examples include factories, office buildings, computer servers, insurance policies, legal contracts and manufacturing equipment – anything that is not continually purchased in the course of production of a good or service.
The main characteristics or features of fixed capital are listed as follows:
Purchase of fixed assets.
Promotion and expansion of business.
Low liquidity.
Permanent in nature.
Primary sources.
Amount of fixed capital.
Long-term needs of business.
Source of wealth and risk.
Source of profit.
Appreciation and depreciation.
Miscellaneous features.
The main role or importance of fixed capital is listed in following eight points:
Fixed capital is required to buy fixed assets for the company.
It is needed to meet various promotionl expenses of a company.
It aids a company to modernise by easing the process of purchasing modern machines and implementation of latest technologies.
It is necessary to replace out of date and scrapped assets.
It helps in expansion and diversification of a company.
It also helps in automation of a company.
It is essential if a company decides to widen its scope of activities.
It increases the capital requirements of a company.
5. Methods of evaluating of fixed assets. The value of revaluation of fixed assets.
Методы оценки основного капитала. Значение переоценки основных средств.
In finance, a revaluation of fixed assets is a technique that may be required to accurately describe the true value of the capital goods a business owns. This should be distinguished from planned depreciation, where the recorded decline in value of an asset is tied to its age.
Fixed assets are held by an enterprise for the purpose of producing goods or rendering services, as opposed to being held for resale for the normal course of business. An example, machines, buildings, patents or licenses can be fixed assets of a business.
It is common to see companies revaluing their fixed assets. It is important to make the distinctions between a 'private' revaluation to a 'public' revaluation which is carried out in the financial reports. Thepurposes are varied:
To show the true rate of return on capital employed.
To conserve adequate funds in the business for replacement of fixed assets at the end of their useful lives. Provision for depreciation based on historic cost will show inflated profits and lead to payment of excessive dividends.
To show the fair market value of assets which have considerably appreciated since their purchase such as land and buildings.
To negotiate fair price for the assets of the company before merger with or acquisition by another company.
To enable proper internal reconstruction, and external reconstruction.
To issue shares to existing shareholders (rights issue or follow-on offering).
To get fair market value of assets, in case of sale and leaseback transaction.
When the company intends to take a loan from banks/financial institutions by mortgaging its fixed assets. Proper revaluation of assets would enable the company to get a higher amount of loan.
Sale of an individual asset or group of assets.
In financial firms revaluation reserves are required for regulatory reasons. They are included when calculating a firm's funds to give a fairer view of resources. Only a portion of the firm's total funds (usually about 20%) can be loaned or in the hands of any one counterparty at any one time (large exposures restrictions).
To decrease the leverage ratio (the ratio of debt to equity).
Valuation of various assets can be made by using different methods. Valuation of fixed assets can be made in different ways. Some of the major methods are as follows:
1. Cost Method. In this method, valuation of assets is made on the basis of purchase price of the assets. It is very simple method of valuation of assets. Sometimes, existence of one assets depends on the existence of another. Then it is difficult to use this method.
2. Market Value Method. Valuation of assets can be made on the basis of market price of such assets. But if same nature of assets is not available in the market, it is very difficult to determine the value of such assets. So, there are two methods related to it. They are:
Replacement Value Method. If same asset is to be purchased then on the basis of same value, valuation of assets can be done.
iNet Realizable Value. It refers to the price in which such asset can be sold in the market. But expenditure incurred at the sale of such asset should be deducted.
3. Base Stock Method. Under this method of valuation, company should maintain certain level of stock and valuation of stock is made on the basis of valuation of base stock.
4. Standard Cost Method. Some of the business organizations fix the standard cost on the basis of their past experience. On the basis of standard cost, they make valuation of assets and present in the balance sheet.
5. Average Cost Method. It is a simple method for the valuation of such assets which cannot be distinguished. Like petrol, petrol is kept in the tank but e cannot separate its stock on the basis of lot. So, valuation of stock is made adding to all the cost and dividing by the quantity.