MACD - Moving Average Convergence & Divergence

This is one of the important technical analysis techniques and is used to predict movements in the stock market. MACD is the difference between short term moving average and long term moving average. This difference helps in identifying, whether prices in the recent past have moved upward or downward as compared to longer period movement. With the help of MACD line various signals can be generated. 

            MACD = Short period moving average (Minus) long period moving average

Simply buy and sell signals can be generated with the help of MACD, when this indicator is in a positive zone, it indicates buying as the share prices are likely to move upward in future. On the contrary, when

Rate of Change (ROC)

ROC (Rate of change) is another technical analysis tool which helps in identifying ‘Overbought’ and ‘Oversold’ market situation. With the help of this, buying and selling signals are generated much before the market makes a movement. In calculating ROC, current market price is divided by the price which prevailed a few days ago for share. The value so achieved is known as ‘Rate of change’.

                                  ROC = Current price / Price n days ago

ROC value is plotted on a graph and this moves above or below a central value, that is, one ‘1’. Here ROC value one ‘1’ is the benchmark value. Buying and selling signals are generated as follows:

Buying signals:

• When ROC is more than one ‘1’ (ROC > 1) and moving upward continuously, it indicates that market is likely to move upward.

Capital Budgeting

Before arriving at any decisions related to huge capital investment, every finance manager / analyst tries to evaluate the project on various parameters and at last selects between different available proposals / options. This process of evaluation of multiple proposals which has life of more than a year forms part of capital budgeting process. Thus it plays a vital role in decision making process and is generally used in decisions related to replacement & modernization of machinery, expansion of project and diversification of product line or services..

Assumptions

1) Capital rationing: 

Managers / analyst start with the thought that there is no scarcity of funds and the firm isn't faced with capital rationing.

WACC - Weighted Average Cost of Capital

WACC stands for Weighted Average Cost of Capital. This is also referred as MCC (Marginal Cost of Capital). In simple words, this is generally the rate of return which is being required by business to earn for paying off all the obligations such as Loans, Creditors, Preference Shareholders and Equity Shareholders. In other words, WACC is the required rate of return which the investors demand for above average risk investment of a company. 

Calculation

Generally, company raises capital from sources such as Debt, Equity and instruments which share the same characteristics of Debt and Equity. Most of the firms use more than one source of capital, so in order to get the overall cost of capital, we calculate WACC as follows:

Three Generic Strategies

After understanding the five forces model, it becomes extremely important for you to understand three strategies propounded by Michael E Porter in 1979 and are generally used by companies to defend their market position in the long run and outperform the competitors in the industry.   

Cost leadership strategy

Differentiation strategy

Focus strategy

Cost Leadership Strategy

First generic strategy i.e. Cost leadership comes from aggressive construction of efficient scale facilities, vigorous pursuit of cost reductions from experience, cost control, good inventory management and cost minimization in few areas such as advertisement, service and R&D activities (if any). It provides a good defense mechanism against both powerful buyers and suppliers resulting in control over bargaining powers. Powerful buyers start pressurizing the next competitor to reduce down the prices to the level of cost leader in the market which sometimes proves to be dangerous for next competitor and very few firms survive this in long run due to operational inefficiencies which further lead to the exit of competitors from the industry. It thus serves as a entry barrier to the industry.

BCG Matrix

Overview

This matrix was developed by Mr. Bruce Anderson of Boston Consulting Group (BCG) in 1970’s. Through this matrix, large business groups can take their major decisions on SBUs (Strategic business units) related to growth, diversification & divestment. SBUs are basically business units / organizations which have separate profit centre head and are generally formed with independent missions & objectives. Main purpose of this matrix is to understand the market position of various SBUs on the basis of four combinations obtained from market share & market growth rate. This matrix is most commonly termed as “Growth Share matrix”.

Four combinations are mentioned below:

1. High market share, Low market growth rate – Referred as “Cash Cows”

2. High market share, High market growth rate – Referred as “Stars”

3. Low market share, High market growth rate – Referred as “Question Marks”

4. Low market share, Low market growth rate – Referred as “Dogs”

Five Forces Model - Michael Porter

This topic will add to your knowledge about the underlying sources of competitive pressure which further highlights the critical strengths and weaknesses of the company and clarifies the areas where strategic change may yield the highest payoff. It also highlights the major strengths and weaknesses of industry along with associated opportunities and threats. This model is based upon following five forces.

Fig: Five Forces model by Michael Porter