vu mgt501 Mid Term Subjective Solved Past Paper No.1
vu mgt501 Human Resource Management Solved Past Papers
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Accounting Break-Even Analysis
In simple terms a company breakeven when TR=TC. It is a no profit no loss situation.The sales break-even point is estimated to be the fixed costs including depreciationdivided by the percentage of sales contribution margin, or the fixed costs includingdepreciation divided by one minus the variable cost to sales ratio:
Break-even Sales = Fixed Costs Including Depreciation / [1 - (Var. Cost / Sales)]A project that just breaks even in accounting income terms will have a negative NPV.Accounting break-even analysis does not consider the cost of capital invested in theproject.
There is only one Accounting break-even point.
The economic break-even point is the level of sales from a project needed to generate azero NPV .
The sales level that produces an NPV of zero is always higher than the sales level for theaccounting break-even point.
There are two BE points for economists.& the maximum profit is the widest area betweenthat points.
Break-even Sales = [ (Fixed Costs Including Depreciation )(1-T) + Annual cost of capital - Depreciation] / [ (1-T) {1 - (Var. Cost / Sales)}]
Single period capital rationing
It is a situation where the company has limited amounts of funds in one investment period only. After that period, the company can access funds from various sources, e.g. issuing shares, borrowing from banks or issuing bonds.
Multi-period capital rationing
It occurs where the company has limited amounts of funds for a longer duration of time. The capital constraints extend beyond one investment period. If we assume that it's possible to undertake fractional projects then the problem can be formulated using linear programming. If the projects are indivisible, however, then integer programming should be used.
Capital Asset Pricing Model VS Dividend Growth Model
The dividend growth model approach has limited application in practice because of its two assumptions.
- It assumes that the dividend per share will grow at a constant rate, g, forever
- The expected dividend growth rate, g, should be less than the cost of equity, to arriveat the simple growth formula.
The growth formula is, Cost of equity = (Dividend in year one / Prize in current year) + growth
These assumptions imply that the dividend growth approach cannot be applied to thosecompanies, which are not paying any dividends, or whose dividend per share is growingat a rate higher than cost of equity, or whose dividend policies are highly volatile. Thedividend growth model approach also fails to deal with risk directly. In contrast, theCapital asset pricing model has a wider application although it is based on restrictiveassumptions. The only condition for its use is that the companies share is quoted on thestock exchange. Also, all variables in the Capital asset pricing model are market determined and expect the company specific share price data; they are common to allcompanies. The value of beta is determined in an objective manner by using soundstatistical method.
CAPM is generally seen as a much better method of calculating the cost of equity thanthe dividend growth model (DGM) in that it explicitly takes into account a company'slevel of systematic risk relative to the stock market as a whole.
