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[1] When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money ± a loss of real value in the internal medium of exchange and unit of account in the economy.[2][3] A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.[4] Inflation's effects on an economy are various and can be simultaneously positive and negative. Negative effects of inflation include a decrease in the real value of money and other monetary items over time, uncertainty over future inflation may discourage investment and savings, and high inflation may lead to shortages of goods if consumers begin hoarding out of concern that prices will increase in the future. Positive effects include ensuring central banks can adjust nominal interest rates (intended to mitigate recessions),[5] and encouraging investment in nonmonetary capital projects. Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply.[6] Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities, as well as to growth in the money supply. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth.[7][8] Today, most mainstream economists favor a low, steady rate of inflation.[9] Low (as opposed to zero or negative) inflation may reduce the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reduce the risk that a liquidity trap prevents monetary policy from stabilizing the economy.[10] The task of keeping the rate of inflation low and stable is usually given to monetary authorities. Generally, these monetary authorities are the central banks that control the size of the money supply through the setting of interest rates, through open market operations, and through the setting of banking reserve requirements.[11]

The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum.

2. Accountants call this Net Income or Net Profit After Taxes. is currently financed entirely with common stock (i. on an income statement. T). calculate our estimated EBIT at that level. preferred stock. B. The Analysis I need to raise additional money by issuing either debt. but finance people usually refer to it as EBIT (pronounced as it is spelled . A. I. 2. or net operating income. EPS . but finance people usually refer to it as EAT (pronounced E.Earnings Per Share. S).Earnings After Taxes. . 1.Earnings Before Interest and Taxes. it isn't necessary to start with sales. T). no debt and no preferred stock). Actually. or common stock.000 shares of common stock outstanding. An Illustration For example. let's assume that the company: 1.E. currently pays no common stock dividend. Simply put. it is the amount of income that a company has after subtracting operating expenses from sales (hence the term net operating income). or a combination of both. isn't affected by how the company is financed. This income may be paid out in the form of dividends. (It is pronounced E. Another way of looking at it is that this is the income that the company has before subtracting interest and taxes (hence. Either way. Accountants like to use the term Net Operating Income for this income statement item. Since a company's EBIT. preferred stock. EAT . P. This is the amount of income that the common stockholders are entitled to receive (per share of stock owned). and 3. this simply means that we will calculate what our earnings per share will be at various levels of sales (and EBIT).e. we assume a certain level of sales. Which alternative will allow me to have the highest earnings per share? This question calls for an EBIT/EPS analysis. all earnings are retained and reinvested into the company. EBIT). and common stock).EBIT/EPS ANALYSIS Glossary EBIT . The firm has 2. we can skip down the income statement to the EBIT line and begin there. then calculate what our EPS will be for each alternative form of financing (debt.. retained and reinvested by the company. In other words.

4. 2. Thus.000 new shares of common stock will need be to be sold ($50. minus the last payment. rent or lease payments. The number of shares of common stock will remain unchanged.000 in new money. (The preferred can be sold for $40 per share.The company can sell additional shares at the current price of $50 per share.) The number of shares of common stock will remain unchanged. to an ordinary annuity with one payment more. This means that 1. As financial manager.3. Because each annuity payment is allowed to compound for one extra period.The interest rate on any new debt will be 4% per year. debt . needs to raise $50. you want to know which financing alternative should be used.[4] Deposits in savings. the future value of an annuity-due can be calculated through the formula (variables named as above):[3] (annuity notation) It can also be written as (1 + i) An annuity-due with n payments is the sum of one annuity payment now and an ordinary annuity with one payment less. preferred stock . 3. common stock . you are considering three alternatives: 1.000/$50 per share). and insurance premiums are examples of annuities due. the value of an annuity-due is equal to the value of the corresponding ordinary annuity multiplied by (1+i). and also equal. is in the 35% tax bracket. .3% of the amount of money raised.The dividend yield on preferred stock will have to be 7. ANNUITY DUE Annuity-due An annuity-due is an annuity whose payments are made at the beginning of each period. To raise the $50.000. with a time shift.

15)/1) ) ^(-(3-1))/((. taking into account time value of money concepts such as interest rate and future value. payable annually for 3 years at 9% compounded annually.71 Finding the Periodic Payment(R).15)/12)-1) R = 55000/45. Given A: R = A/(1+ (1-(1+(j/m) ) ^(-(n-1))/(j/m)) Examples: 1.625708885 R = $26659. Given S: R = S\.80 ANNUITY The term annuity is used in finance theory to refer to any terminating stream of fixed payments over a specified period of time. This usage is most commonly seen in discussions of finance.09)/1)-1) R = 1600000/3. Find the periodic payment of an annuity due of $250700. Find the periodic payment of an annuity due of $70000.[1] . R= 250700/(1+ (1-(1+((.15)/12) ) ^(36+1)-1)/((.04 2.67944932 R = $1204.05)/4)) R = 250700/26.5692901 R = $9435. payable annually for 3 years at 15% compounded annually. R= 70000/(1+ (1-(1+((. R=55000/(( ((1+((.05)/4) ) ^(-(32-1))/((. Find the periodic payment of an accumulated value of $1600000. usually in connection with the valuation of the stream of payments. payable monthly for 3 years at 15% compounded monthly. payable quarterly for 8 years at 5% compounded quarterly.573129 R = $447786.15)/1)) R = 70000/2.09)/1) ) ^(3+1)-1)/((. R=1600000/(( ((1+((.46724 2.Thus we have: (value at the time of the first of n payments of 1) (value one period after the time of the last of n payments of 1) Formula for Finding the Periodic payment(R). Find the periodic payment of an accumulated value of $55000./(( ((1+(j/m) ) ^(n+1)-1)/(j/m)-1) Examples: 1.

which can offer an income you cannot outlive and provide a solution to one of the biggest financial insecurities of old age. quarterly. every half-year or every month. calculated at that time. yearly. The payments (deposits) may be made weekly. or after the fixed annuity period expires for annuity payments. An annuity is an investment that you make. perhaps along with a small addition. [2]Annuities are classified by payment dates. or at any other interval of time. which is why they are also called pension plans. Annuity premiums and payments are fixed with reference to the duration of human life. of outliving one¶s income. either for life or for a fixed number of years. Typically annuities are bought to generate income during one¶s retired life.an annuity does not provide any life insurance cover but. offers a guaranteed income either for life or a certain period. the invested annuity fund is refunded.Examples of annuities are regular deposits to a savings account. namely. Annuities are an investment. in return for which you receive back a specific sum every year. monthly home mortgage payments and monthly insurance payments. instead. . monthly. After the death of the annuitant. Annuities differ from all the other forms of life insurance discussed so far in one fundamental way . either in a single lump sum or through installments paid over a certain number of years.

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