What is a Dividend Reinvestment Plan? A dividend reinvestment plan (DRIP) represents a plan that companies offer to shareholders. Through this plan, shareholders can automatically reinvest their cash dividends in additional shares of the company on the dividend payment date. It may also refer to other programs set up by …

What are Ordinary Dividends? Ordinary dividends represent the distribution of a company’s profits to its shareholders after an accounting period. For shareholders, dividends are one of the two primary returns they get on their investment. There are other types of dividends as well, such as special dividends. However, ordinary dividends …

Options are financial instruments that derive their value from underlying securities such as stocks, bonds, etc. These are common in options contracts which offer buyers the opportunity to buy or sell the underlying asset in the future. However, it does not oblige them to do so. Instead, they get the …

Assets are resources that companies own or control and result in future economic inflows. These are expenses that companies and businesses must bear for long-term success. Unlike other expenses, companies cannot charge an asset’s total cost to a single accounting period. It is because the matching principle in accounting requires …

What is the Profitability Index? Profitability Index (PI) is a measure of the ratio between the discounted cash flows and the initial investments for a given project. Another name for the profitability index is the Profit Investment Ratio (PIR) or Value Investment Ratio (VIR). Profitability index is prevalent in capital …

What is the Accounting Rate of Return? The Accounting Rate of Return (ARR) represents the average net income that a company expects to generate from an asset from its capital cost. In other words, it is the return that a company expects on an investment in relation to the initial …

When companies are performing capital budgeting, they must consider various costs related to the projects. Mostly, these include costs directly associated with the project, such as material and labour. However, it may also consist of some other costs, which may not be as clear. These usually include opportunity and sunk …

Companies have several financial statements that report various aspects of their business. Among these, the balance sheet presents the assets and liabilities balances that companies own or owe. However, these do not contain all of those assets or liabilities. It is because some of these items may remain off the …

What is an Off-Balance Sheet? Off-balance sheet items include assets or liabilities that do not appear on a company’s balance sheet. However, that does not mean that these items may not exist. These are the actual assets and liabilities that companies own. However, there are some technical aspects that prevent …

A special-purpose entity (SPE) is a subsidiary company created by a parent company to isolate financial risk. This entity is legally separate from the parent company. It aims to absorb risks that the parent company faces. In some cases, SPEs can hold assets if the parent company enters bankruptcy. Another …