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Solve Complicated Equity Rates Homework to Know More about Equity

by Jun 4, 2017Homework Solution

“Today, I have realized that my knowledge of equity is helping me a lot in expanding my capital.”

In present days, the best way to expand your capital is an investment in the equity market. Savings and fixed deposits cannot give you the interest that you can earn from this volatile market. But it is highly risky to invest your money in this market.

Therefore, one needs to do thorough research before investment. Students from accounts background learn about equity account during their three years course. They need to solve several complicated equity rates homework, which in turn enhance their knowledge in equity and its attributes.

What is equity?

It is one of the primary account types in an accounting system that represents the owner’s stake in a company.  Equity is equivalent to assets minus all liabilities. However, its definition varies on the basis of context and the type of asset. As per financial accounting, equity is one’s degree ownership in any asset, following the payment of all debts related to those assets.  Stocks are also equity as they stand for ownership in a company, even though ownership of shares in a public company usually does not consider as part of liabilities.

Different forms of equity:

  • Private equity

In a private company, a stock or any other security that represents an ownership interest is termed as private equity.

  • Shareholders’ Equity

Shareholders contribute some funds on a company’s balance sheet. Those funds plus the retained earnings or losses are known as shareholders’ equity.

  • Equity in context of margin trading

In this context, it is a difference between the value of securities in a margin account and the amount one borrows from the brokerage.

  • Equity in context of real estate

In this context, it is the current fair market value of the property minus the amount the possessor still owes on the mortgage. It represents the amount which the possessor will obtain once it sells a property and clear the mortgage.

  • Ownership equity

It represents the amount which is left after paying off all the credits when a business goes bankrupt. Such equity is also known as risk capital or liable capital.

Equity rates homework

While studying equity, students often receive equity rates homework. This topic is a little bit complex because there are several factors which students need to consider to calculate equity rates.  There is a close relationship between equity rate and cost of equity which is the return a business needs to settle if an investment complies its capital return requirements.

A business uses the cost of equity as a capital budgeting threshold to settle the equity rates. A company’s cost of equity characterizes the compensation a market deserves for owning the asset and accepting all types of risks associated with the ownership.

The traditional formula for calculating cost of equity is Dividend per Share (for the forthcoming year) divided by Current Market Value of Stock Plus Growth Rate of Dividends.

While solving equity rates homework, students should keep in mind that as any company can raise capital in two ways, debt or equity. The main difference between the two methods is that company needs to pay back debt, but it doesn’t have to pay back equity. However, the cost of equity is higher than the debt due to the tax benefits of interest payments.

Though equity costs more compared to debt, it usually generates a higher rate of return compared to debt.  Students have to learn dividend growth model as well as capital asset pricing model to evaluate the cost of equity.

Equity Market- An important chapter

As a part of equity rates homework, students also have to do thorough studies on the equity market. It is a market where companies issue shares and sell them, either via bourses or over-the-counter markets. Equity market or the stock market is one of the most important areas of a market economy. It allows companies to access capital by enabling investors to own a part of company’s shares.

While studying about equity markets, students must read about read about NASDAQ where companies can sell their stocks electronically.  Though the world is transforming toward digitization, the physical stock exchange is also equally popular, for example, the New York Stock Exchange (NYSE).

How are shares traded in equity market?

Sellers set a specific price for selling its share, while investors bid their price to buy the shares. An investor whose bid matches with the seller’ price can buy those shares, and a transaction takes place. A company sells its shares in the market whenever it needs money to expand its business.

Equity is an interesting chapter. There are several points which the students must understand clearly to gain proficiency in investment. Equity rates homework aims to develop essential skills in students so that they can make right investment at the right time. In financial accounting, students learn about equity and all of its attributes in detail. Students can also take online help for completing their homework and learn more about this volatile market.