FAIR VALUE, FACE VALUE, NOMINAL VALUE, MARKET VALUE, REAL VALUE, BOOK VALUE

Confused with several terms

These are some terms often used in Accounting and Finance. Many really understand the difference or simply get confused between the jargons. So, this is a little article trying to uncomplicated and give you a better understanding of the terms.

Face Value/ Nominal Value/ Par Value

Face value is the price of the security at the time of its Issue.  It doesn’t change over the time.  And guess what? Nominal Value and Par Value are just another name for it

Market Value

It is the price listed in the exchange or the price at which it is traded in Market

Book Value

It is the price calculated by the company and recorded in their books. They deduct all debt and arrive at a price or value. For shares it is calculated as: (Total Shareholders’ Equity – Preference Shares)/Number of Outstanding Shares

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In terms of Assets, Book value is what investors look at to know how much a company is worth if it ceased its operation today. All the tangible assets – Debt gives you Book Value. More the value better the position of the company.

Fair Value

It is rightly valuing or estimating the price of an asset or share or services. It is used by the investors to get a clear picture of prices which may otherwise be overpriced or under-priced by the market. A company calculates its fair value annually and in case of takeovers or mergers shares/assets are bought at the fair value. It is individually calculated based on various factors such as demand-supply, risk factors, returns, actual utility, etc

Bond fair value is formula based to calculate the present value of future cashflows.

Real Value

Real value is when the price is corrected for the inflation rate.

I hope this article helped you.

-D.V.P

Service Tax

 

Service Tax is an Indirect Tax.  Why is it called an Indirect Tax? Well, you the consumer pay it indirectly to the government.

Service Tax was introduced in India in 1994 by Finance Minsiter Manmohan Singh with an intention to reduce tax burden from Manufacturing /Servicing companies for the services they provide. So how is the burden reduced? It is transferred to the consumers. The service tax is pre calculated and added to the price of a product. When you purchase a product, you are paying the service tax on the product and this amount is paid back to the government by the company.

This service tax is only applicable to those firms whose turnover is more than Rs.10 lacs per annum and all states other than Jammu and Kashmir.  Currently the service tax rate in India is 12.36%.

Service Tax  ——————————————– 12.00%

+ Education Cess @ 2%——————————-  0.24%

+Senior and Higher Education Cess @1%———0.12%

Effective Tax rate                                          12.36%

 

For Firm’s Accounting:

When you sell a product/service you receive the Service Tax from the consumer. You will record it as ST Payable as you are obliged to pay it back to the government what you received it from the consumers or end users.

When you purchase a product/service you are paying service tax the retailer or supplier.  You are the buyer or creditor. If you are a firm purchasing from a supplier, you will record the service tax amount paid on your purchase as ‘’ST Receivable’’.  As you have already paid this ST, this amount will be set off against your ‘’ST Payable’’ obligation.

-D.V.P

How Stock Index and its daily percentage changes are calculated

The stock market fluctuates daily. Someday it rises high and someday reaches rock bottom.  There are several stock indexes across the globe i.e. S&P 500, Dow Jones, Nikkei 225, Sensex, Nifty, etc.

These indexes are the statistical weighted average of few major companies listed under them. Sensex is calculated based on 30 companies and Nifty on 50 companies. It will be easier to understand with an example.

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Assume the calculation for an Index called ABC ( I will take very small fictional numbers so that there is no confusion)

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ABC takes into consideration 3 companies ( just for simple calculation).  These companies are available for trading. FREE-FLOAT MARKET CAPITALISATION METHOD IS USED TO CALCULATE INDEX.  It is simply multiplying the number of shares available to public with the current market price of the share.

Eg: XYZ company with 2000 shares, out of which only 1500 shares available for public trade at market price Rs. 120/- per share

=1500*120= Rs.180,000 Free Float Market capitalisation

MNO  company with 3000 shares, out of which only 2000 shares available for public trade at market price Rs. 500/- per share

=2000*500= Rs.1000,000 Free Float Market capitalisation

PQR company with 1000 shares, out of which only 800 shares available for public trade at market price Rs. 200/- per share

=800*200= Rs.160,000 Free Float Market capitalisation

So, total Free Float Market Capitalisation = 180,000+1000,000+160,000=1,340,000

Now, the year ABC INDEX had begun or the BASE YEAR it would have the initial Market Cap value like the one we calculated now. (eg: Sensex’s base year is 1978-79)

So now we take 2 assumptions about base year and its Market Cap

1. Base year: 2000-01
2. 2.       Market Cap: Rs.200,000

The base year Market Cap is considered 100. So daily or within every few minutes how much the Market Cap has increased or decreased to that base year is calculated

Calculation of ABC INDEX: 1,340,000* 100/200,000= 670 points

Tomorrow if the share prices of companies change and the Free Float Market Cap changes from Rs.1,340,000 to Rs.1,335,000 then how the changes are shown?

Calculation: 1,335,000* 100/200,000= 667.5 points

The Stock Market Index has gone down from 670 points to 667.5 points, i.e. the market is down by 2.5 points

Percentage Decrease = 2.5/670*100 = 0.37%

So, that’s how you get the news: The Market Today is at 667.5 points, down by 2.5 points or 0.37%.

Please do give me your feedback about the article and if you have any more doubts you want to be clear on. Thankyou.

DVP

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Know Your EMI Calculations and your Overall Payment

Presently people are being provided plethora of choices to take Loans. Home Loans, Car Loans, Personal

EMI Calculation and Overall Payment

loans, Education Loans and so on. Loan makes life easier but along with it comes the EMI (Equated Monthly Instalments).

People pay EMI monthly for years together usually ranging from 1-20 years. It makes it very convenient to pay small amounts from time to time rather than a lump sum amount at once.

But did you ever think how much your Overall EMI total up to in years? Or how is this EMI calculated? You can do it yourself so that you have an idea how much you need to shell out and which scheme will benefit you more. The longer duration you take the higher you end up paying. The EMI might be low but the overall payment throughout the years increases.

Gather information about various schemes in which you are interested. You need to know 3 things

1. The amount of loan you require
2. The Annual Interest rate of a Bank on a loan
3. Number of years (more specifically months) to repay the loan

Formula to calculate:

E = P×R×(1 + R)ⁿ/((1 + R)ⁿ – 1)

E = EMI

P= Loan Amount

R= Rate of Interest (divide it by 12 to make it monthly interest)

Eg:

1. Leela takes a loan of Rs.1 lac for 3 years (i.e. 36 months)  at an interest rate of 12 %

Calculate his EMI and Overall amount paid at the end of 3 years

Calculation:  (100,000*12%)*(1+12%/12)³⁶/((1+12%/12)³⁶-1)

= 3321.43

So your EMI is Rs.3321.43

Now that you are paying it every month for 3 years, how much it totals up to:

= 3321.43 *36 = Rs.119,572/-

So overall you pay Rs. 119,572 in total (excluding the bank charges/processing fee)

Let us calculate a similar sum with longer duration

1. Krishnan takes a loan of Rs.1 lac for 5 years (i.e. 60 months)  at an interest rate of 12 %

Calculate his EMI and Overall amount paid at the end of 5 years

Calculation:  (100,000*12%)*(1+12%/12)⁶⁰/((1+12%/12)⁶⁰-1)

= 2224.44

So your EMI is Rs.2224.44/-

Now that you are paying it every month for 3 years, how much it totals up to:

= 2224.44 *60 = Rs.133,467/-

So overall you pay Rs. 133,467 in total (excluding the bank charges/processing fee)

So as you see in both the examples, the amount was same, the rate was same but as the Krishnan took loan for more years his overall payment is higher though the monthly EMI was low.

I hope this article helped you.

For all those Non-finance students who want to skip the torturous calculation please download the below link and simply feed in your loan details and you will get the results calculated.

https://docs.google.com/spreadsheet/pub?key=0AlC7HnnNgD3KdGk2TjFZTnUwUlktUVNIQVBMQjZ2https://docs.google.com/spreadsheet/pub?key=0AlC7HnnNgD3KdGk2TjFZTnUwUlktUVNIQVBMQjZ2Tnc&output=xls

Great Brains, Good Heart 🙂

D.V.P