Trending March 2024 # Types And Benefits Of Recourse Loan With Example # Suggested April 2024 # Top 5 Popular

You are reading the article Types And Benefits Of Recourse Loan With Example updated in March 2024 on the website Cattuongwedding.com. We hope that the information we have shared is helpful to you. If you find the content interesting and meaningful, please share it with your friends and continue to follow and support us for the latest updates. Suggested April 2024 Types And Benefits Of Recourse Loan With Example

What is a Recourse Loan?

Start Your Free Investment Banking Course

Download Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

Key Takeaways

Some of the key takeaways of the article are:

A recourse loan is a financing instrument in which the lender can seize the collateral and any other assets in the defaulter’s name to recover the debt money.

Examples of other assets include other bank deposits, income sources, etc.

A recourse loan is backed by collateral and the borrower’s liability. Hence, the lender has to assume significantly lower risk in this type of loan.

Although there are many different recourse loans, the two most common types are hard money loans and auto loans. Not all mortgages are recourse loans, but the hard money loans in real estate purchases are recourse loans.

Examples of Recourse Loan

Let us now look at the following example to understand the concept of recourse loans.

Four years back, John got a stable job in a multinational company with an annual package of $75,000. Three months after joining the job, he purchased a house worth $300,000 in the countryside. However, when he checked his savings account, he realized that he had a savings of $60,000, which he decided to use as equity in this real estate purchase. So, he approached a bank for a housing loan of $240,000.

Unfortunately, today John defaulted on the bullet payment, and the lender immediately seized his house for foreclosure and subsequent recovery of the debt from the sale, resulting in proceeds of $75,000. So, the remaining $75,000 (= $150,000 – $75,000) plus the interest cost will be recovered through garnishment, wherein the outstanding loan balance will be directly deducted from his monthly paycheck until the entire loss amount is settled.

In this way, the recovery of losses occurs in a recourse loan when the borrower defaults.

Types of Recourse Loan

Hard money loans: In the case of a real estate acquisition, a hard money loan is considered a recourse loan because its terms give the lender the right to take possession of the borrower’s property after default and then resell it for a more significant gain.

Auto loans: Since the value of automobile cars depreciates over a period, which exposes the lenders to the risk of adequate recovery in the event of a default. Hence, most auto loans are recourse loans in nature.

Benefits of Recourse Loan

Some of the significant benefits of a recourse loan are as follows:

Some assets adequately back it in the form of collateral. Besides, there is the total liability of the borrower, which means that the lender doesn’t need to bear too much risk.

Borrowers get recourse loans as per their credit profile and financial position. People with good credit histories are offered favorable interest rates, while those with poor credit histories can get the loan on the back of their unlimited liability.

With such flexibility in lending terms, these loans result in the maximum flow of money in an economy through more frequent and easy lending.

First, the borrowers who default on a recourse loan may lose much more than the collateral provided because the lender invariably goes after the borrower’s other assets and income stream to recover the outstanding loan balance.

Further, the borrower who fails to repay a recourse loan loses not just the money, but such an event can be a very traumatic experience for them. It can get tricky for them to cope psychologically.

Conclusion

So, it can be seen that a recourse loan is a binding debt financing instrument that secures the lenders and makes their life much easier. But, on the other hand, it is not so favorable for the borrowers as they may be exposed to severe consequences in the event of a default. Hence, borrowers should consider all the aspects of the loans before signing up for any recourse loan.

Recommended Articles

You're reading Types And Benefits Of Recourse Loan With Example

Types And Criteria With Example

Definition of Non-Controlling Interest

Start Your Free Investment Banking Course

Download Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

Explanation

The portion of the interest is left out after the holding company’s claim. For example, Zee Ltd wants to acquire 60% of the equity shares of B Ltd, so in this case, out of 100% holding of B Ltd, 60% will be given to Zee. Now Zee will be the holding company, and the rest of the shares % which is 40%, will be considered as Non-controlling interest. They will not allow to manage any company affairs and not require interfering in the company’s decisions. Sometimes a situation arises when there are losses in the company, so in that case, the losses which apply to the It is combined subsidiary may exceed the non-controlling interest of the single subsidiary. The non-controlling interest holders get the share as per the confined % of the controlling interest they share in the company.

Example

Solution:

Particulars

Total

Holding Company

Controlling Interest (80%)

Non controlling interest ( 20%)

Share Capital    800,000.00                     640,000.00             160,000.00

Reserve      60,000.00                       48,000.00               12,000.00

   860,000.00                     688,000.00             172,000.00

Types

There are two types of non-controlling interest: direct non-controlling interest and another is Indirect non-controlling interest.

In direct non-controlling interest, the minority shareholders, i.e., those who are non-controlling interest bearing in the company, will get the profits to share of pre and post-acquisition. In contrast, in the case of indirect non-controlling interest, only post-acquisition profits are shared with the minority interest holders, and the pre-acquisition profits are not shared. The non-controlling Interest holders get a share of this distribution as per their controlling interest percentage in the company.

Criteria for Non-Controlling Interest Recording of Non-Controlling Interest

First of all, we must find that the acquisition is on which date.

Then find out the company which acquires and the company which is acquiring.

Calculation of Pre-acquisition and Post-acquisition profits are done.

Calculation of Pre-acquisition and Post-acquisition of reserves and surpluses are done.

In the next step, the distribution of profits takes place.

The Minority Interest record is under the head of Equity and Liability.

Minority Interest is separately recorded in the Balance sheet with its own name.

Advantages

Non-Controlling Interest holders can anyway get access to the company’s financial books.

Taking a small share as a minority interest holder in a very emerging business can help the growth of individual investors.

The Non-Controlling Interest holders can see the business developments and get an insider’s view to plan their investment in such a way.

In most cases, the minority interest holders gain a huge average return on their funds since they know the company’s norms.

The risk also subsides because a huge investment does not require from the minority interest holders, and thus they can enjoy the benefit of the low risk and more gains on returns.

In the case of a business sale, the minority interest holder can sell part of this stake without many legal complications.

Conclusion

It is a very wide term. Minority shareholders of the company are not allowed to participate in the company’s meetings, but sometimes they can make a decision for the board members. If the board’s performance is not satisfactory, then the minority shareholders can ask the board to take action against them. In the corporate, the minority interest holder meeting and voting can be very influential. Non-controlling Interest holder also makes huge profits and returns on their investment in the company. They make very little investment per the company’s emerging business but can gain huge profits. Non Controlling Interest also gets their share in case of an acquisition. It is given emphasis in the Balance Sheet and is shown as a separate item.

Recommended Articles

Operators In C++ With Example: What Is, Types And Programs

What are Operators?

An operator is a symbol used for performing operations on operands. An operator operates operands. The operations can be mathematical or logical. There are different types of operators in C++ for performing different operations.

Consider the following operation:

a = x + y;

In the above statement, x and y are the operands while + is an addition operator. When the C++ compiler encounters the above statement, it will add x and y and store the result in variable a.

In this C++ Tutorial, you will Learn:

Types Of Operators in C++

There are mainly 6 different types of operators in C++

Arithmetic Operators

Relational Operators

Logical Operators

Bitwise Operators

Assignment Operators

Other Operators

Arithmetic Operators

They are the types of operators used for performing mathematical/arithmetic operations. They include:

Operator Description

+ addition operator Adds to operands.

– subtraction operator Subtracts 2nd operand from 1st operand.

* multiplication operator Multiplies 2 operands.

/ division operator. Divides numerator by denominator.

% modulus operator Returns remainder after division.

++ increment operator Increases an integer value by 1.

— decrement operator. Decreases an integer value by 1.

For example:

using namespace std; int main() { int a = 11; int b = 5; int c;

cout << “a + b is :” << a+b << endl;

cout << “a – b is :” << a-b << endl;

cout << “a * b is :” << a*b << endl;

cout << “a / b is :” << a/b << endl;

cout << “a % b is :” << a%b << endl;

cout << “a++ is :” << a++ << endl;

cout << “a– is :” << a– << endl;

return 0; }

Output:

Here is a screenshot of the code:

Code Explanation:

Including the iostream header file in our code. It will allow us to read from and write to the console.

Including the std namespace so as to use its classes and functions without calling it.

Calling the main() function inside which the logic of the program should be added. The { marks start of body of the main() function.

Declaring an integer variable a and initializing it to 11.

Declaring an integer variable b and initializing it to 5.

Declaring an integer variable c.

Printing value of operation a+b alongside other text on the console.

Printing value of operation a-b alongside other text on the console.

Printing value of operation a*b alongside other text on the console.

Printing value of operation a/b alongside other text on the console.

Printing value of operation a%b alongside other text on the console.

Printing value of operation a++ alongside other text on the console.

Printing value of operation a– alongside other text on the console.

The main() function should return an value if the program runs fine.

End of the body of the main() function.

Relational Operators

These types of operators perform comparisons on operands. For example, you may need to know which operand is greater than the other, or less than the other. They include:

Operator Description

== equal to operator. Checks equality of two operand values.

!= not equal to operator Checks equality of two operand values.

> great than operator Checks whether value of left operand is greater than value of right operand.

< less than operator. Checks whether value of left operand is less than value of right operand.

>= greater than or equal to operator Checks whether value of left operand is greater than or equal to value of right operand.

<= less than or equal to operator. Checks whether value of left operand is less than or equal to value of right operand.

For example:

using namespace std;

int main() { int a = 11; int b = 5;

cout << “a=11, b=5” << endl; if (a == b) { cout << “a == b is true” << endl; } else { cout << ” a == b is false” << endl; }

if (a < b) { cout << “a < b is true” << endl; } else { cout << “a < b is false” << endl; }

} else { }

return 0; }

Output:

Here is a screenshot of the code:

Code Explanation:

Including the iostream header file in our code. It will allow us to read from and write to the console.

Including the std namespace so as to use its classes and functions without calling it.

Calling the main() function inside which the logic of the program should be added. The { marks start of body of the main() function.

Declaring an integer variable a and initializing it to 11.

Declaring an integer variable b and initializing it to 5.

Printing some text on the console stating the values of variables a and b.

Performing the arithmetic operation, a==b in an if decision making statement to know whether it’s true or false. The { marks the beginning of the body of the if statement.

Text to print on the console if the operation a==b is true. The endl is a C++ keyword for end line. It pushes the cursor to start printing in the next line. The } marks the end of the body of the if statement.

The else part of the above if statement. It states what to do if the operation a==b is false.

Text to print on the console if the operation a==b is false. The endl is a C++ keyword for end line. It pushes the cursor to start printing in the next line. The } marks the end of the body of the else statement.

Performing the arithmetic operation, a<b in an if decision making statement to know whether it’s true or false. The { marks the beginning of the body of the if statement.

Text to print on the console if the operation a<b is true. The endl is a C++ keyword for end line. It pushes the cursor to start printing in the next line. The } marks the end of the body of the if statement.

The else part of the above if statement. It states what to do if the operation a<b is false.

Text to print on the console if the operation a<b is false. The endl is a C++ keyword for end line. It pushes the cursor to start printing in the next line. The } marks the end of the body of the else statement.

The main() function should return an value if the program runs fine.

End of the body of the main() function.

Logical Operators

The logical operators combine two/more constraints/conditions. Logical operators also complement evaluation of original condition under consideration. They include:

Operator Description

&& logical AND operator. The condition is true if both operands are not zero.

|| logical OR operator. The condition is true if one of the operands is non-zero.

! logical NOT operator. It reverses operand’s logical state. If the operand is true, the ! operator makes it false.

For example:

using namespace std; int main() { int a = 5, b = 2, c = 6, d = 4; cout << “a equals to b AND c is greater than dn”; else cout << “AND operation returned falsen”;

cout << “a equals to b OR c is greater than dn”; else cout << “Neither a is equal to b nor c is greater than dn”;

if (!b) cout << “b is zeron”; else cout << “b is not zero”;

return 0; }

Output:

Here is a screenshot of the code:

Code Explanation:

Including the iostream header file in our code. It will allow us to read from and write to the console.

Including the std namespace so as to use its classes and functions without calling it.

Calling the main() function inside which the logic of the program should be added.

The { marks start of body of the main() function.

Declaring 4 integer variables a, b, c and d and assigning them different values.

Using the && (AND) operator inside the if statement. It joins two conditions, value of a equals to value of b and, value of a is greater than value of b. First condition is false, second condition is true. False&&true is False, hence, the outcome of if is false.

Text to print on console if the above if statement is true. This won’t be executed.

Part to be executed if the above if statement is false.

Text to print on the console if the if statement is false. This will be executed.

Text to print on console if the above if statement is true. This will be executed.

Part to be executed if the above if statement is false.

Text to print on the console if the if statement is false. This will not be executed.

Checking whether value of variable is 0.

Text to print on console if the above if statement is true. This will not be executed.

Part to be executed if the above if statement is false.

Text to print on the console if the if statement is false. This will be executed.

The main() function should return an value if the program runs fine.

End of the body of the main() function.

Bitwise Operators

Bitwise operators perform bit-level operations on operands. First, operators are converted to bit level then operations are performed on the operands. When arithmetic operations like addition and subtraction are done at bit level, results can be achieved faster. They include:

Operator Description

& (bitwise AND). It takes 2 numbers (operands) then performs AND on each bit of two numbers. If both are 1, AND returns 1, otherwise 0.

| (bitwise OR) Takes 2 numbers (operands) then performs OR on every bit of two numbers. It returns 1 if one of the bits is 1.

^ (the bitwise XOR) Takes 2 numbers (operands) then performs XOR on every bit of 2 numbers. It returns 1 if both bits are different.

<< (left shift) Takes two numbers then left shifts the bits of the first operand. The second operand determines total places to shift.

>> (right shift) Takes two numbers then right shifts the bits of the first operand. The second operand determines number of places to shift.

~ (bitwise NOT). Takes number then inverts all its bits.

using namespace std;

int main() { unsigned int p = 60; unsigned int q = 13; int z = 0;

z = p & q; cout << “p&q is : ” << z << endl;

z = p ^ q; cout << “p^q is : ” << z << endl;

z = ~p; cout << “~p is : ” << z << endl;

z = p << 2; cout << “p<<2 is: ” << z << endl;

return 0; }

Output:

Here is a screenshot of the code:

Code Explanation:

Including the iostream header file in our code. It will allow us to read from and write to the console.

Including the std namespace so as to use its classes and functions without calling it.

Calling the main() function inside which the logic of the program should be added. The { marks start of body of the main() function.

Declaring an unsigned integer variables p and assigning it a value of 60, which is, 0011 1100 in binary.

Declaring an unsigned integer variables q and assigning it a value of 13, which is, 0000 1101 in binary.

Declaring an integer variable z and initializing it to 0.

Performing the bitwise & (AND) operation on variables p and q and storing the result in variable z.

Printing the result of the above operation on the console alongside other text.

Printing the result of the above operation on the console alongside other text.

Performing the bitwise ^ (XOR) operation on variables p and q and storing the result in variable z.

Printing the result of the above operation on the console alongside other text.

Performing the bitwise ~ (NOT) operation on variables p and q and storing the result in variable z.

Printing the result of the above operation on the console alongside other text.

Performing the left shift operation on variable p and storing the result in variable z.

Printing the result of the above operation on the console alongside other text.

Performing the right shift operation on variable p and storing the result in variable z.

Printing the result of the above operation on the console alongside other text.

The main() function should return an value if the program runs fine.

End of the body of the main() function.

Assignment Operators

For example:

x = 5;

In the above example, x is the variable/operand, = is the assignment operator while 5 is the value. Here are the popular assignment operators in C++:

Operator Description

= (simple assignment operator) It assigns value on the right to variable on the left.

+= (Add AND assignment operator) It first adds value of left operand to value of right operand then assigns result to variable on the left.

-= (Subtract AND assignment operator) It first subtracts value of right operand from value of left operand then assigns result to variable on the left.

*= (Multiply AND assignment operator) It first multiplies value of left operand with value of right operand then assigns result to variable on the left.

/= (Division AND assignment operator) It first divides value of left operand by value of right operand then assigns result to variable on the left.

For example:

using namespace std; int main() { int x = 5; cout << “Initial value of x is ” << x << “n”;

x += 5; cout << “x += 5 gives :” << x << “n”;

x -= 5; cout << “x -= 5 gives : ” << x << “n”;

x *= 5; cout << “x *= 5 gives :” << x << “n”;

x /= 5; cout << “x /= 5 gives : ” << x << “n”;

return 0; }

Output:

Here is a screenshot of the code:

Code Explanation:

Including the iostream header file in our code. It will allow us to read from and write to the console.

Including the std namespace so as to use its classes and functions without calling it.

Calling the main() function inside which the logic of the program should be added.

The { marks start of body of the main() function.

Declaring an integer variables x and assigning it a value of 5.

Printing value of variable x alongside other text on the console. The n is a new line character. It moves the cursor to the next line when printing.

Adding 5 to value of variable x and assigning result to variable x.

Printing value of variable x on the console alongside other text.

Subtracting 5 from value of x and assigning result to variable x.

Printing value of variable x on the console alongside other text.

Multiplying value of variable x with 5 and assigning result to variable x.

Printing value of variable x on the console alongside other text.

Dividing value of variable x by 5 and assigning result to variable x.

Printing value of variable x on the console alongside other text.

The main() function should return an value if the program runs fine.

End of the body of the main() function.

Other Operators

Let us discuss other operators supported by C++:

sizeof operator

This operator determines a variable’s size. Use sizeof operator to determine the size of a data type.

For example:

using namespace std; int main() { cout<<“Size of int : “<< sizeof(int) << “n”;

cout<<“Size of char : ” << sizeof(char) << “n”;

cout<<“Size of float : ” << sizeof(float) << “n”;

cout<<“Size of double : ” << sizeof(double) << “n”;

return 0; }

Output:

Here is a screenshot of the code:

Code Explanation:

Including the iostream header file in our code. It will allow us to read from and write to the console.

Including the std namespace so as to use its classes and functions without calling it.

Calling the main() function inside which the logic of the program should be added. The { marks start of body of the main() function.

Determining the size of integer data type using sizeof operator and printing it alongside other text on the console.

Determining the size of character data type using sizeof operator and printing it alongside other text on the console.

Determining the size of float data type using sizeof operator and printing it alongside other text on the console.

Determining the size of float data type using sizeof operator and printing it alongside other text on the console.

The main() function should return an value if the program runs fine.

End of the body of the main() function.

Comma Operator

The comma operator (,) triggers the performance of a sequence of operations. It expresses first operand and discards the result. Next, it evaluates the second operand and returns the value and type.

using namespace std; int main() { int x, y; y = 100; x = (y++, y + 10, 99 + y); cout << x; return 0; }

Output:

Here is a screenshot of the code:

Code Explanation:

Including the iostream header file in our code. It will allow us to read from and write to the console.

Including the std namespace so as to use its classes and functions without calling it.

Calling the main() function inside which the logic of the program should be added. The { marks start of body of the main() function.

Declaring two integer variables x and y.

Assigning the variable y a value of 100.

Incrementing value of y and assigning result to variable x. It start with y at 100, then increments it to 101 (y++). Next, y is added to 10. Finally, y, still at 101, is added to 99, giving 200. x is now 200.

Printing value of variable x on the console.

The main() function should return an value if the program runs fine.

End of the body of the main() function.

Conditional Operator

This operator evaluates a condition and acts based on the outcome of the evaluation.

Syntax:

Condition ? Expression2 : Expression3;

Parameters:

The Condition is the condition that is to be evaluated.

Expression1 is the expression to be executed if condition is true.

Expression3 is the expression to be executed if condition is false.

For example:

using namespace std; int main() { int a = 1, b; b = (a < 10) ? 2 : 5; cout << “value of b: ” << b << endl; return 0; }

Output:

Here is a screenshot of the code:

Code Explanation:

Including the iostream header file in our code. It will allow us to read from and write to the console.

Including the std namespace so as to use its classes and functions without calling it.

Calling the main() function inside which the logic of the program should be added. The { marks start of body of the main() function.

Declaring two integer variables a and b. Variable a has been assigned a value of 1.

Assigning value to variable b. If variable a is less than 10, b will be assigned the value 2, otherwise, b will be assigned a value of 5.

Printing value of variable b on the console alongside other text.

The main() function should return an value if the program runs fine.

End of the body of the main() function.

Operators Precedence

A single operation may have more than one operator. In that case, operator precedence determines the one evaluated first.

The following list shows the precedence of operators in C++, with decreasing precedence from left to right:

Summary:

Operators are symbols for performing logical and arithmetic operations.

Arithmetic operators help us perform various arithmetic operations on operands.

Relational operators help us perform various comparison operations on operands.

Logical operators help us perform various logical operations on operands.

Bitwise operators help us perform bitwise operations on operands.

Assignment operators help us perform various arithmetic operations on operands.

The sizeof operator returns the size of a variable or data type.

The comma operator executes a sequence of operations.

The conditional operator evaluates a condition and acts based on the outcome.

Types And Measures Of Risk Averse With Advantages

Definition of Risk Averse

Risk averse refers to investors who prefer lower risk over a high rate of returns. They choose to invest their money to earn a guaranteed return, even if it is less, so there remains little or no risk of loss. Generally, the rate of returns remains the same or exceeds slightly depending upon inflation for risk averse investors.

Start Your Free Investment Banking Course

Explanation

Risk averse describes the attitude of the investors willing to get a guaranteed return. There is always a risk in investment, but higher returns also attract higher risks. Some investors don’t want to risk their savings getting subsumed with any kind of loss. Hence, they prefer to invest in such investments where they can constantly earn, no matter low or high. The high rate of return does not attract these kinds of investors but gets facilitated by the idea of earning constantly, and due to their lower risk appetite, they want to take a very low risk.

Example

Consider investments like fixed deposits, certificate deposits, or other fixed-income instruments. These kinds of investments offer fixed returns with no or very low risks. An investor who is risk averse would consider such investments for the portfolio to maintain the risk at the lowest level possible.

Types of Investors Risk Averse

There are three types of investors depending upon their way of dealing with the risks:

Risk averse: Such investors avoid risk as much as they can. They prefer a lower rate of return with no risk rather than a high rate with higher risk, as they are afraid to bear any loss in their investments.

Risk Neutral: Such investors neither take too much risk nor avoid risks. They take a calculated risk because they don’t want to bear heavy losses. They usually take medium risks to get a medium or high rate of return.

Risk Loving: Such investors love to take risks, and they look at investment as a gamble in which they can earn a huge rate of return or bear huge losses. They are not afraid of losses because they always get lured by the high rate of returns.

Measures of Risk Averse

Measures of Risk Averse are:

1. Absolute Risk Averse (ARA)

When the risk is high, u(c) curvature will also get higher. However, there is a measure ‘Arrow-Pratt measure of absolute risk aversion that stays constant with respect to these transformations. It is named Arrow Prat measure after the names of the economists Kenneth Arrow and John W. Pratt. It is defined as

A (c) = – un (c)

u1 (c)

Where,

2. Relative Risk Aversion (RRA)

The Arrow-Pratt measure of relative risk aversion (RRA) is defined as

R (c) = cA (c) = –cun (c)

u1 (c)

where,

u(c) represents the utility curve as a function of wealth being “c” It is not like ARA, whose units are $-1; the RRA measure is a dimensionless measure due to which it is applied universally. This measure of risk-averse is still valid.

The implication of increasing/decreasing absolute and relative risk aversion: The implication of increasing or decreasing absolute and relative risk aversion helps form the portfolio with one asset risky and the other risk-free. If the investor’s wealth increases, then there is an increase in the risk asset; likewise, if there is a decrease in the investor’s wealth, the investor will choose to increase the risk-free assets.

3. Portfolio Theory

A=dE(c) / dσ

An = dE(c) / d nõn

Advantages

Investment without fear: A risk averse investor can invest without any fear of getting losses as the money invested here provides a return guarantee. This attracts investors who don’t want to bear any kind of loss in investment.

Constant return: Risk averse investors enjoy the constant return on their investment. They get almost the same or similar returns.

Low risk: There is a very low or almost no risk for risk averse investors.

Loss of opportunity: The main fallback of risk averse approach is that the investor loses the opportunity of earning a high return as they are not ready to take any significant risk.

Almost No Increase in Return: The returns the investors get are almost the same as there is no increment in the return, or a very little increase in return can be seen.

Dependent On Inflation: The increase in the rate of return for risk averse investors is dependent on inflation, which means the rate of return increases only when there is inflation in the country.

Conclusion

Every investor has their own preference for investments. Risk averse investors are those who are not attracted by high returns or a chance of getting a huge profit. They just don’t want their investment to bear any kind of loss; they want guaranteed returns on investments regardless of low returns.

Recommended Articles

Example And Explanation With Excel Template

What is CAPE Ratio?

CAPE Ratio, abbreviated form for Cyclically-Adjusted Price to Earnings Ratio, is used as a valuation tool to measure the relationship between the company’s earnings per share over a period of 10 years and company’s stock price flushing out all the fluctuations which may occur in the company’s profits during various business cycles and different periods and seasons.

Start Your Free Investment Banking Course

Formula

The formula for CAPE ratio is:

CAPE Ratio = Stock Price / 10-Years Average Earnings Per Share Adjusted for Inflation

Explanation

CAPE ratio is considered to be a valuation measure which takes into consideration the effect of a company’s earning over a period of a decade post considering the effect of inflation and its simultaneous relation with that company’s stock price in the market. The utmost important point here is that the CAPE ratio can be also applied to any type of indices to get an idea about whether the market is over-valued or under-valued.

This is also referred to as the Shiller P/E ratio, as it was largely popularized by a professor of Yale University, namely, Robert Shiller.

Example of CAPE Ratio (With Excel Template)

Let’s take an example to understand the calculation in a better manner.

You can download this CAPE Ratio Excel Template here – CAPE Ratio Excel Template

Example #1

Carivacous Ltd is listed in a stock exchange currently trading at $1500 per share. The current year EPS of the company is $125. Below given table provides details of earnings per share (EPS) of the past 10 years pertaining to the stock of Carivacous Ltd. Along with EPS, inflation rates are provided pertaining to the specified years respectively. Calculate the CAPE ratio for Carivacous Ltd.

Solution:

PE Ratio is calculated using the formula given below

PE Ratio = 1500 / 125

PE Ratio = 12

10-Years Average Earnings Per Share Adjusted for Inflation is calculated as

CAPE Ratio is calculated using the formula given below

CAPE Ratio = Stock Price / 10-Years Average Earnings Per Share Adjusted for Inflation

CAPE Ratio = 1500 / 49.73

CAPE Ratio = 30.16

Thus, it can be seen that although the PE for the stock for the current year is 12, its CAPE ratio is at 30. Alternatively, you can also say that the stock is overvalued.

Example #2

Let us take a different example to understand the valuation aspect of a stock or index. Now, consider that an Index has a PE ratio of, say 20 with a historical PE ratio of 24. Now, post computing the CAPE ratio (as explained in the earlier example), the CAPE ratio for the index stands at 34. Please give an explanation of the valuation of the index.

In the case at hand, it is pertinent to note that the current PE of the Index, 20, is very similar or nearby to its historical PE, which is at 24.

Now, you may note that the historical PE is a formula to calculate average PE of the stock or index over the period of 10 years as a simple average. On the other hand, the CAPE ratio stands at 34, which takes into consideration the inflation and cyclical impact of the EPS over a period of 10 years. Even after such adjusted, the CAPE ratio is fairly higher than the current PE and historical PE, which makes the index quite overvalued and risky to be invested in.

Uses of CAPE Ratio

It is mainly used as a financial tool to analyze the PE ratio of a company or index post considers the impact of cyclical changes in the economy over a period of 10 years.

Apart from being used as a financial tool, the CAPE ratio is used to determine whether the stock of a listed company is over-valued or under-valued, as it is quite similar to the PE ratio.

A consistent analysis of the CAPE ratio will be useful as a tool for analyzing the future trends and patterns of the stock or index, as the case may be.

Below we will learn about the limitation and benefits of CAPE ratio:

Advantages

Given below are the main benefits of CAPE ratio:

It is a very simple mathematical formula and thus easy to calculate by anyone having a basic knowledge of finance;

Due to the fact that this ratio considers the average value of EPS over a period of time, it balances out the effect of any cyclical returns the company may generate and thus gives a better picture of the earnings by the company;

It takes into consideration the impact of inflation on the economy.

The main concern is that the ratio considers an average of earnings for a period of 10 years. In a practical scenario, there are various changes that a business may undergo in such a long timeframe and thus affecting the way business is being carried on for over the years. In such a situation, it may not be right to compare a business today with what it was a decade ago;

In addition to the above point, it needs to be noted that the law governing the business changes massively over such long timeframe and making an impact of the way business is being carried on;

It may be noted that there are various companies that declare and pay dividends to their shareholders. Ratio is completely independent of this and does not take into account any dividend numbers;

Another point that is important and yet not considered while computing the ratio is that the market keeps fluctuating and so does the demand market of a particular stock.

Conclusion

To conclude the whole discussion, it shall be right to say that the CAPE ratio is a tool or method to measure the valuation aspect of any stock or index. It provides an answer in the form of whether the stock or index is over-valued or under-valued. It takes into consideration the impact from an economics point of view and also of the fact of any cyclical changes which may affect stock or index and thus it a better measure to get an insight about future returns of the stock or index in question.

Recommended Articles

This is a guide to the CAPE Ratio. Here we discuss how to calculate the cape ratio along with practical examples. We also provide a downloadable excel template. You may also look at the following articles to learn more –

Importance And Example Of Green Investments

What is Green Investments?

Start Your Free Investment Banking Course

Download Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

Explanation of Green Investments

Corporations, private equity firms, hedge funds, and individuals can raise funds for green investment. Typically these funds are raised in securities, mutual funds (MFs), electronically traded funds(ETFs), and bonds. According to a report prepared by Global Sustainable Investment Alliance, nearly $31 trillion was held under various green investment instruments, constituting around one-third of the globally held assets under management in 2023.

Example of Green Investments

Now, let us look at some examples of green investments available as investment funds or ETFs for various investment opportunities.

Water Stock: Calvert global Water fund, Allianz gi water fund, first trust water ETF, Invesco Global Water Portfolio ETF, Invesco Water Resources Portfolio ETF, Zacks Global Water Index, iShares U.S. Utilities Index ETF, and Invesco S&P Global Water Index ETF.

Wind Power: First Trust Global Wind Energy ETF.

Solar Energy:Invesco Solar ETF,

Pollution Control: Invesco Cleantech ETF andVanEck Vectors Environmental Services ETF.

Water Stock: Pacific Gas and Electric Company, Idacorp Inc., and Brookfield Renewable Partners.

Wind Power: General Electric, Siemens Gamesa Renewable Energy, NextEra Energy Partners, and Vestas Wind Systems.

Solar Energy: First Solar Inc., JinkoSolar Holding Co. Ltd., Sunpower Corp., Enphase Energy Inc., Vivint Solar Inc. andSunrun Inc.

Waste Reduction: Republic Services Inc., Covanta Holding Corp, and Waste Management Inc.

Opportunities of Green Investments

There are several avenues of green investments, and some of them are briefly discussed below:

Green Power: Today’s world faces the dire consequences of major climatic change. In such a scenario, a source of power generation for homes and industries without using fossil fuels is like a knight in shining armor. As such, it is attracting a growing number of investors every day.

Water Stock: One of the most important natural resources available to humans. The climate changes in the last couple of years have resulted in growing fear among the people that they may eventually run out of fresh water. As such, considerable investment has been made in the sustainable collection, purification, and distribution of water.

Wind Power: It is one of the fastest-growing renewable energy sources that has grown 75 times over the last twenty years. China, the US, and Germany are the front runners, with an installed capacity of 217GW, 96GW, and 59GW, respectively. Recently, many investors have been interested in wind farms or considering the companies producing wind turbines.

Solar Energy: It is another source of renewable energy wherein energy from sunlight generates power, mostly used for domestic purposes with limited industrial use. In the last couple of years, the sun has risen in this industry as investors have focused on companies that manufacture solar panels and other related products.

Pollution Control: The only way to control pollution is to reduce pollution. As such, the government has been concentrating on reducing greenhouse gas emissions from industrial set-ups, abatement of vehicle emissions, etc. To implement such large-scale measures, the government requires support in the form of investments.

Waste Reduction: With the change in lifestyle, the need for waste reduction has increased manifold. Most of us know the things that can be recycled, but there has been a large increase in the number of products (e.g. cell phones, batteries, etc.) that can’t be recycled. In this case, it is important that we reuse them and reduce the accumulation of such waste. As such, there is a growing business surrounding these recycled items, which involves huge investments too.

Importance of Green Investments

Green investments are important because the world is transitioning to green practices, including waste recycling and power generation through wind and solar. Everyone is aware of the ill effects of climate change, and most are taking a keen interest in solving the issues at hand. In other words, green investments can be the way to ease the burden that humankind has placed on the environment.

Advantages

Green investment can attract a good amount of public attention owing to awareness and interest, making fundraising much easier.

Owing to healthy demand, the borrowing costs of green investment are usually on the lower side.

Most of green investments enjoy the benefit of tax exemption.

At times, there is no clarity regarding the purpose of the investment.

Currently, most companies are in their initial phase, which results in low revenues and exorbitantly high valuations. This makes the investment in such companies riskier.

Conclusion

So, by now, you should be able to appreciate that many investment options are available if you are interested in green investments. You can opt for individual companies or other investment instruments like MFs, ETFs, bonds, etc.

Recommended Articles

Update the detailed information about Types And Benefits Of Recourse Loan With Example on the Cattuongwedding.com website. We hope the article's content will meet your needs, and we will regularly update the information to provide you with the fastest and most accurate information. Have a great day!