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Homework answers / question archive / Define market capitalization and its impact on organizations; list its formula and explain each component? (7
Define market capitalization and its impact on organizations; list its formula and explain each component? (7.5marks)
A company's most important goal is to make money and keep it, which depends on liquidity and efficiency. Because these characteristics determine a company's ability to pay investors a dividend, profitability is reflected in share price.Therefore investors should know how to analyze various facets of profitability; including how efficiently a company uses its resources and how much income it generates from operations. Define how to calculate and analyze a corporate profit margin and reflect on the impact of COVID-19 on 2020s corporations profit margins. (12.5marks)
Define the Time Value of Money and its relation to the present value of cash flows.
Market Capitalization
Market capitalization refers to how much a company is worth as determined by the stock market. It is defined as the total market value of all outstanding shares.It is one of the most effective way of evaluating the value of a company . This evaluation of comapny's value is done based on a company's stocks. Essentially, this is defined by the total market value of outstanding share of a company. This also means that publicly owned coampanies are the only ones which can be evaluated by this method.
Formula:
MC = N MULTIPLIED WITH P
Where,
MC Stands for Market Capital,
N for the number of outstanding shares,
and P is the closing price of each share of the concerned company.
TIME VALUE OF MONEY
The time value of money validates that it is more beneficial to have cash now than later. For example if you invest Rs. 100 today the returns will be more compared to the same investment made 2 months from now. Moreover, there is always a risk that the borrower might delay even more or not pay at all in the future.
Formula:
FV = PV x [ 1 + (I/ N) ] (N*T)
Where,
FV is Future value of money,
PV is Present value of money,
I is the interest rate,
N is the number of compounding periods annually and
T is the number of years in the tenure.
Present value of money is the money you have currently that is equal to a future one-time disbursal or several part-payments – discounted by a suitable rate of interest.
