Normal and Inferior Goods
Normal Goods Normal goods are goods whose demand increases with an increase in consumers’ income. Note that the rate at which demand increases is lower than the rate at which income increases. The rate eventually slows down with further increments…
Income and Substitution Effects
Substitution Effect A substitute is a good that satisfies the same need as another good, e.g., broccoli and cauliflower. The substitution effect states that a good becomes more of a bargain relative to other goods as its price declines; therefore,…
Income Elasticity, Price Elasticity, and Cross Elasticity
Elasticity measures the sensitivity or responsiveness of one variable to another. There are three main forms of elasticity – price elasticity, income elasticity, and cross-price elasticity. Price Elasticity Price elasticity of demand is a measure of how a product’s demand…
Operating, Business, Sales, and Financial Risks
Risk can be defined in several ways. However, one fairly simple definition is that “risk refers to the uncertainty of a return and the potential for financial loss.” Risk can arise from financing and operating activities and can be classified…
Flotation Costs Explained
Flotation costs are expenses that a company incurs during the process of raising additional capital. The value of these flotation costs is related to the amount and type of capital being raised. When a company raises debt and preferred…
Cost of Noncallable, Nonconvertible Preferred Stock
[vsw id=”HkoJ_nedolg” source=”youtube” width=”611″ height=”344″ autoplay=”no”] A preferred stock that does not give its holder the right to convert their preferred shares into a fixed number of common shares, usually after a predetermined date, is called a nonconvertible preferred stock….
Calculating Cost of Debt Capital
The cost of debt is the cost of financing a debt whenever a company incurs a debt by either issuing a bond or taking a bank loan. Two methods for estimating the before-tax cost of debt are the yield-to-maturity approach…
