Category Archives: Economics and Finance

Cost of Debt

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Cost of Debt (COD) is an effective rate that a company will pay on it current debt. The Cost of Debt (COD) can be measured in term before or after tax COD however the after tax Cost of Debt (COD) is often used.

After tax Cost of Debt (COD) is mathematically expressed in the equation below;

cod equation

Where;

Di = individual loan amounts

ri = interest rate of the individual loan

Dt = total loans that a company has

t = company corporate tax rate, %

Note: the interest payment on loans is classified as an operating expense and it is a tax deductible. Continue reading →

Source of Funds for Company

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Every company in any business requires sources of fund to run the business. Two ways that companies can obtain funds are Debt Funding and Equity Funding.

Debt Funding

Debt funding is to borrow money from financial instructions and the companies must pay interest and load at some stage depending on payback scheme.

Short term borrowing can come from the following sources;

  • overdraft
  • commercial paper

Long term borrowing can come from the following sources;

  • corporate bonds
  • long term loans
  • mortgages

Equity Funding

Equity often means an ownership interest in a business. The companies sell shares to equity investors as financial institutions, insurance companies, individual investors, etc and these equity investors become the owner of the companies (share holders). The equity investors expect to get regular dividends and a capital gain from the company’s growth. However, there will not guaranteed outcome of the future performance of the company to their share holders. If the company goes bankrupt, the ordinary share holders will be the last group of people who will get the money back. Continue reading →

Oil Price – Price Inelasticity of Demand

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Oil price is quite unique from other products because it cannot be easily substitute. Therefore, the demand will be less elastic because many consumers will buy oil regardless of how much it costs. For this situation, the oil price is called as a price inelastic of demand.

What is it – price elastic of demand?

Price inelasticity of demand - Oil Price Continue reading →

Effect of Demand Shifters

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Demand changes can effect on quantity of supply in both positive and negative ways. For this time, we will look at 5 factors of demand shifters and how they affect on price and quantity of products in the market.

effect-of-demand-shifter

Five Demand Shifter Factors are as follows;

  1. Number of potential buyers in the market – increase or decrease of buyers wanting to buy product in the market
  2. Buyers’ taste and preferences – fashion products as jeans may be in trend this season, the buyers want to buy them so the price goes up. For next season, the same model of jeans may not be a fashion trend so buyers don’t want to buy them. The price will drastically drop.
  3. Buyers’ income – Increase in buyers’ income will have a great purchasing power. Conversely, decrease in buyers’ income will badly affect on demand to buy things.
  4. Buyers’ expectation – This is the expectation of buyers of future market conditions and it will impact on the economy outlook if there are a lot of buyers having the same expectations.
  5. Price of substitute and complementary goods – Substitute goods are products that can be use in place of one another such as potatoes and rice. Complementary goods are products the used together such car and fuel.

Continue reading →