Posted: February 18th, 2022
MODULE CODE – 24257
ASSIGNMENT – CRD2322
Table of Contents
Typically, a business and career owner always depends on the personal satisfaction of self-promoted pride, which eventually creates a healthy structure of accomplishment. A particular business can generate a profit margin for the time being. Based on several ownership company’s profit calculations, we can be sure of the entire profit structure. Since they first created almost every company of this type based on the goal of being their boss mentality and, of course, earning profits (Kamrad et al. 2021). Besides only calculating the bank account for profitability, we can describe three different methods as well, as follows:
Firstly, the profit ratios of the company on a monthly or quarterly basis. At some points, yearly ratios have also been calculated.
Secondly, a detailed breakdown analysis of the company’s revenues and units sold separately in most cases.
Thirdly, investments in the products of the company. Sometimes assets are counted as well.
Since there are various techniques for preparing the income and profitability of one business, if the income statement had not been prepared beforehand, then the break-even analysis of counting the profits would be the most appropriate one. As for business structure, different structures of multiple numbers are used to describe a company’s monetary statements, such as the net profit income of annual sales. For example, we can tell these profit ratios based on the following manner:
2:1, 2 to 1, 2/1, 2
The profitability ratios of a company can be followed up by four different structural ratios, such as:
(Net sales minus the cost of product sales from the company)
(Operation’s profit = gross company profit minus product sales and other administrative expenses, excluding all taxes).
(Operation’s profit minus any extra expenses, excluding all taxes)
The operation’s profit structure is just a sign of mentioning the earning capacity of the company’s current structure, which includes the total monetary transactions that have been observed over time. As the cost of created products is subject to changes, the gross margin is also subject to changes from one period to another, which affects the pricing policies of the company’s goods. If the company’s operating income is not sufficient enough, the other sources of cash to consider are:
In understanding what the financial leverage of a firm is, one has to understand the probable not so negative relationship between the company’s return and profitability and the exact costs of the risks the company has taken over time. they can easily explain these few inter-relationships based on the returns of various investments, which create many more opportunities based on the owners’ own money or wealth. These details usually affect the return structure very easily, and these types of risk and return methodology are called capital asset pricing models, which normally determine the equity costs of the company. As there are no risks, this equity is normally measured and categorized for further measurements (Ladas, et al. 2021).
CAPM looks like an equilibrium that creates the return and unavoidable risk, and these structural assumptions are as follows:
Basically, these costs of equity have been categorized by three standards:
There are other ways to explain how the firm’s financial leverage affects the return on equity. A shortage of required funds in various business companies may suffer in the long run, but if that has been arranged in a not so practical manner, the whole setup will suffer for a long time to come (Zeidi, et al. 2021). To point out these particular situations, there are various different sources of functions such as equity, share capital, and debt that can be used in the company. However, it can be observed that each source of a company’s capital costs is different, and the capital structure balance sheets are maintained based on the company’s debts. The example above shows how funds are generated to trade capital, primarily to purchase assets and wages of the company. Since the capital structure is one of the most complex financial decisions, the company’s equity share capital does show the whole cost proportions of debt instruments. The company’s equity share capital is what that company does not have the capital to buy assets from the investor. Effective capital structure decisions provide risk, return, and value, which indicate if there is a decline in funds, total combinations of them may not be affected as the total cost of company capital, which increases the importance of capital structure studies. A reduced amount of equity reduces the risk that may affect investment returns, while a greater proportion of debt reduces the cost of capital and debt interest expenses.
Kamrad, B., Ord, K. and Schmidt, G.M., 2021. Maximizing the probability of realizing profit targets versus maximizing expected profits: A reconciliation to resolve an agency problem. International Journal of Production Economics, 238, p.108154.
Kumar, S., Kaushik, N. and Verma, A., 2021. Does earnings management impact firm performance? Empirical evidence from India. Afro-Asian Journal of Finance and Accounting, 11(4), pp.471-489.
Ladas, K., Kavadias, S. and Loch, C., 2021. Product Selling vs. Pay-Per-Use Service: A Strategic Analysis of Competing Business Models. Management Science.
Zeidi, A.R. and Makrani, K.F., 2021. The Role of Earnings Management in Theoretical Development and Improving the Efficiency of Accounting-Based Financial Distress Prediction Models.
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