Tutor profile: Niluka A.
Subject: Corporate Finance
How does systematic risk affect the individual stock return?
According to the capital asset pricing model, an asset's systematic risk is determined by how closely the asset's returns co-move with the overall market returns. The more closely the two returns co-move, the higher the systematic risk the asset is subject to. In the model, this risk is characterized by a single parameter, called the asset's beta parameter. This beta parameter is calculated as follows: beta = covariance between asset returns and market returns / variance of market returns Given beta, the asset's expected return, when the market is in equilibrium, is given by: expected return = risk free rate + beta * (market return - risk free rate) The above equation suggests that the higher the systematic risk, the higher the return an asset is expected to earn, in order to compensate for the risk
What is the distinction between the convertible and non-convertible debentures?
Convertible Debentures are the kind of debentures which have the option to get converted to equity after a specified period or maturity. Non-convertible Debentures are the kind of debentures which do not have the option to get converted to equity. Only the principal amount and accumulated interest is paid at the time of maturity.
How to determine the functional currency when a company is dealing with many currencies?
IAs 21 says that the functional currency is the currency of the primary economic environment in which the entity operates. In most cases, it is crystal clear. Normally, it’s the currency in which the company makes and spends money. And, in most cases it will be just the currency of the country where you operate. But, not in all cases. One good example are factories owned by Western countries, operating in low labor cost countries like India, Cambodia or so – such a subsidiary in India makes sales mostly in Western currency, like USD. People are paid in INR, but the materials are again purchased in USD. In this case, the functional currency is USD despite the fact that the subsidiary is incorporated in India.
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