Tag Archives | capitalization

Return On Equity Example

Return On Equity Example

A return on equity example – Melanie, after seeing success in her corporate career, has left the comfortable life to become an angel investor. She has worked diligently to select companies and their managers, hold these managers accountable to their promises, provide advice and mentoring, and lead her partners to capitalization while minimizing risk. At this stage, Melanie is ready to receive her pay-out. As a result, Melanie wants to know her Return on Equity ratio for one of her client companies.

So, Melanie begins by finding the net income and average shareholder’s equity for the venture. Looking back to her records, Melanie has invested $20,000 in the business. Her net income from it is $6,000 per year. Performing her return on equity analysis yields the following results:

Return on equity: $6,000 / $20,000 =30%

Melanie is happy with her results. Purposefully starting small, she has built the experience and confidence to be successful. She can now move on to bigger and better deals.

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return on equity example

See Also:

Return on Common Equity (ROCE)
Return on Equity (ROE)

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Euronext Definition

See Also:
New York Stock Exchange (NYSE)
London Stock Exchange (LSE)
Frankfurt Stock Exchange (FSE)
Shanghai Stock Exchange (SSE)

Euronext Definition

What is the Euronext definition? The Euronext exchange was formed in the year 2000 through a merger between the Amsterdam, Paris, and Brussels exchanges. In addition, it is one of the larger exchanges in Europe in terms of trading volume and market capitalization.

Euronext Meaning

The Euronext market is traded using an electronic system called the New Quotation System. The great thing about this electronic system is that it allows an investor to invest without even contacting his/her broker. Simply submit the order via the internet. If the system does not execute the order immediately, then submit it into the limit order book. Euronext currently has agreements with several other European markets, and they have become known as cross-trade agreements. In 2007, Euronext merged with the NYSE group. As a result, many around the world know it as the NYSE-Euronext. It is the first global stock exchange. The most commonly used Euronext index is the CAC 40. In addition, the CAC 40 is the 40 most significant companies in a capitalization weighted index of the 100 largest companies within the Euronext.

euronext definition

 

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Capitalized Interest

See also:
Capitalize
Interest Expense
Interest Rate
Generally Accepted Accounting Principles (GAAP)
Financial Accounting Standards Board (FASB)

Capitalized Interest Definition

The capitalized interest definition is the interest on the cost of construction, or a self constructed asset by a company. Interest capitalization occurs because it is a part of the cost in developing the asset for the company’s future use.

Capitalized Interest Meaning

Capitalized interest means that a company is usually developing its own assets. Or it may be involved in the construction industry where a bid on a project typically includes the interest. Typically, interest capitalization construction occurs when a company is developing assets for its own use like the construction of a building for new office space. It might also include the construction and development of equipment items that a company uses in its operations. Construction companies use capitalized interest accounting because it is considered like the self-constructed assets as part of their cost. Because construction companies do not receive full payment for a construction project until it is completed, the companies have a need to go out and finance the majority of the construction costs until they receive payments.

Therefore, consider the interest expense to be part of the normal costs associated with construction. Thus, properly account for the capitalized interest expense on the balance sheet instead of the income statement. Do this until the company completes the project.

Capitalized Interest Example

For example, Jimbo Slice is the CEO of Chupacabra Inc.. He is looking to construct a new building in downtown Houston, Texas. The company must first secure capitalized interest mortgage for the new office space. Jimbo goes to visit the bank to try and gain access to a loan. After consideration, the bank grants Jimbo the loan for the construction. It will cost an estimated $4 million to complete at an interest rate of 9%. The interest expense is thus capitalized on the balance sheet because the construction is for Chupacabra’s new office space and no one else in particular. Given the numbers, Chupacabra will capitalize the interest expense of $90,000 per year assuming that the company will complete construction in 4 years.

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capitalized interest

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Capitalization Rate Example

See Also:
Capitalization Rate
General Ledger Reconciliation and Analysis
Valuation Methods
Shareholders Equity
Planning Your Exit Strategy
Mergers and Acquisitions

Capitalization Rate Example

John started a real estate company in Indiana. His company has recently begun operations and is beginning to make money. John now wants to strengthen his business; to do this requires the best understanding of the company and it’s working environment. John wants to know the capitalization rate of his company as a whole. This includes net operating income and costs for the financials of the entity.

John speaks with his accountant and finds the data to calculate his capitalization rate. With this, he can find his answer.

Net income = $1,000,000 Cost = $250,000

Capitalization Rate = $100,000 / $250,000 = 4

John knows that his capitalization rate is 4. Next, he speaks with his accountant. He finds that, for this industry, John is doing fairly well for himself. He can use the net income, beyond cost of the bank loan he took, to pay down his loan and begin expanding the company on cash flow. This has immense benefits for both John’s growth and profit potential. John begins to compare the capitalization rate with the discount rate that banks take to create expectations for his next capital project.

He is very happy to hear this. John can now find out how he will use the money rather than worrying about what he will do to please his banker. With the future in sight, he can become a forward thinking business owner.

Conclusion of Capitalization Rate Example

By developing a better understanding about his company, John is more likely to be running a successful and profitable company. The capitalization rate is a good indicator of the overall capabilities of the company. By utilizing the capitalization rate, John now has the overall profits of the company compared with the overall costs of the company. The ratio created is useful for John because it shows that the overall profits of the company is four times that of the overall costs. As said above, John now knows that he can now concentrate on expenditures of money because his capitalization rate is so positive.

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capitalization rate example

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capitalization rate example

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Capitalization Rate

See Also:
Capitalization Rate Example
Capitalization
Annual Percent Rate (APR)
Wage Rate
Currency Exchange Rates

Capitalization Rate Definition

The Capitalization Rate definition is a formula which represents the difference between annual net operating income and cost of capital. Its use in the business world serves the main purpose of valuation, including the following:

For example, the rate for hotels provides market knowledge about how well competitors pay for the capital they take.

Capitalization Rate Meaning

Capitalization Rate (CR) means a method to understand how company operations help overcome the cost of capital. Knowing this leads to a piece of information for a company; that it can pay for the price of resources. Furthermore, this shows the value of any project a company chooses to begin. It is a general valuation tool. It is also supported by the use of other financial ratios depending on industry and specific needs. In conclusion, CR is a business valuation tool.

Capitalization Rate Formula

Use the following simple capitalization rate formula to calculate CR. Remember, it can lead to great benefits.

CR = annual net operating income / cost

Calculation

Capitalization rate is processed, with the proper information, quite easily. See the following example for the capitalization rate calculation:

If:
Net income = $1,000,000
Cost = $250,000

Then:
CR = $100,000 / $250,000 = 4

Capitalization Rate and Business Valuation

Are you looking at utilizing capitalization rate as a valuation tool? When valuing a business, it is standard practice to consult with a valuation firm. Need help finding one? We will get you connected with one of our strategic partners for your valuation needs. Fill out the form below to get connected:

Your information will be received between 9-5 Monday through Friday. You can expect to hear back within 24 hours. We only use your information to contact you for the desired help.

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Capitalization Rate Definition, Capitalization Rate Formula, Capitalization Rate

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Capitalization Rate Definition, Capitalization Rate Formula, Capitalization Rate

 

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Capitalization

See Also:
Company Life Cycle
Market Positioning
Insider Trading
Dispersion
Adjusted Present Value (APV) Method of Valuation
Capitalization Rate

Capitalization in Finance

In finance, capitalization in finance is the sum of a company’s debt and equity. It represents the capital invested in the company, including bonds and stocks.

Capitalization can also mean market capitalization. Market capitalization is the value of a company’s outstanding shares of stock. It also represents the value of the firm according to investors’ perceptions. It is equal to the number of shares outstanding multiplied by the share price.

Market Capitalization = Shares Outstanding x Share Price


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Capitalization in Accounting

In accounting, capitalization refers to recording costs as assets on the balance sheet instead of as expenses on the income statement. A company may record the purchase price of an asset, as well as the asset’s acquisition costs, such as transportation and setup, as assets on the balance sheet.

Capitalization in accounting also refers to transferring an off-balance-sheet operating lease onto the balance sheet and recording it as a capital lease. To do this, calculate the present value of the future operating lease payments and record the amount on the balance sheet as an asset with a corresponding liability.

Capitalization of Cost

For example, a manufacturing company may record the cost of raw materials, direct labor, and overhead as assets – where labor and overhead would be capitalized costs. The assets (including the capitalized costs) are then transferred to the income statement as costs of goods sold as the underlying assets are sold to customers. Capitalizing costs increases the value of total assets and equity on the balance sheet, as well as net income on the income statement.

If you want to add more value to your organization, then click here to download the Know Your Economics Worksheet.

Capitalization in Finance, Capitalization in Accounting

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Capitalization in Finance, Capitalization in Accounting

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