Key Features of Business Models
A business model outlines how a business is organized to deliver value to its customers. A business model encompasses the following aspects: A business model describes what a business is about, how it runs its operations and generates revenue and…
Tests of Independence Using Contingency Table Data
With categorical or discrete data, correlation is not suitable for assessing relationships between variables. Instead, we use a non-parametric test called the chi-square test of independence, which employs a chi-square distributed test statistic. We employ a contingency table to structure…
Tests of Independence
Parametric versus Non-parametric Tests of Independence A parametric test is a hypothesis test concerning a population parameter used when the data has specific distribution assumptions. If these assumptions are not met, non-parametric tests are used. In summary, researchers use non-parametric…
Optimal Capital Structure
//www.youtube.com/embed/PFbiNV1640k The target capital structure of a company refers to the capital the company is striving to obtain. In other words, target capital structure describes the mix of debt, preferred stock, and common equity expected to optimize a company’s stock…
Modigliani-Miller Capital Structure Propositions
A firm’s capital structure is the mix of debt and equity it uses to finance its investments. A capital structure decision aims to determine the financial leverage to maximize a company’s value by minimizing the weighted average cost of capital…
Matrix Pricing
Matrix Pricing Process Matrix pricing is a valuation method widely utilized by financial institutions to estimate the fair value of a security that is not actively traded. This process is especially significant for bonds and other fixed-income securities, which may…
Relationships Between Bond Prices and Bond Features
Inverse Relationship – Bond Price and YTM The price of a bond and the yield-to-maturity have an inverse relationship. The same is shown in the blue line in the figure below for a bond with a maturity of 5 years…
Bond Price Calculation Based on YTM
Bond Price Calculation The price of a bond is influenced by various factors, including its cashflow features and market discount rate. The cash flow features are periodic payments made to bondholders, such as interest or coupon payments. On the other…
Explain Factors Affecting Capital Structure
Both internal and external forces influence a corporation’s capital structure, varying among countries and sectors. These factors include: $$ \begin{array}{l|l} \text{Internal factors} & \text{External factors} \\ \hline \text{Business model characteristics} & \text{Market conditions} \\ \hline \text{Cash flows and Profitability} &…
Weighted-Average Cost of Capital
//www.youtube.com/embed/PFbiNV1640k Cost of Capital The cost of capital is the rate of return the suppliers of capital (shareholders and debtholders) require as compensation for their capital contribution. In other words, the cost of capital can be seen as the opportunity…
