Calculation of ARR

Hello friends,

There is a lot of confusion between us regarding the concept of ARR. Why we use ARR?

What we derive after calculating ARR?

This won’t be the hectic problem further.

For this first of all we need to know that what ARR. Is?

ARR calculates the return, generated from net income of the proposed capital investment. The ARR is a percentage return. Say, if ARR = 10%, then it means that the project is expected to earn ten paisa out each rupee invested. If the ARR is equal to or greater than the required rate of return, the project is acceptable.

Note- The ratio does not take into account the concept of time value of money.

There are approximately 10 methods of calculating ARR. In those methods the most commonly 7 methods are used for calculating ARR. Those ares-

ARR = (average income after tax)/ Initial investment

ARR = (average income after tax)/ Average investment

ARR = (average income after tax but before interest) / Initial investment

ARR = (average income after tax but before interest) / Average investment

ARR = (average income before interest and tax)/ Initial investment

ARR = (average income before interest and tax)/ Average investment

ARR = (total income after tax but before depreciation –initial inv.)/ (Initial inv./ 2) * Year

Process of calculating income-

Annual cash flow 1000

Less- Expenses 100

Net annual cash flow 900

Less- depreciation 150

Earning after Dep. OR earnings before tax 750

Less- tax@30% 225

Net earnings after tax and dep. 525

Method of calculating average investment-

Average invt. = (Book value at the beginning of year 1 + book value at the end of useful life)/2

OR

Average investment =net book value of investment at the starting of each year after reducing depreciation/no. of years

Now we can calculate ARR by putting the values in the applicable formula used by that particular firm.

calculation of sensex

Hello friends,

Whenever you heard that Sensex has gone up by 1.2% or went down by 4%. The first question comes in our mind that “what is Sensex?” and the second question comes in our mind that “how we are affected by that?”

So this would not be a tough task further. This article explains how the value of the “BSE Sensex” is calculated.

Sensex stands for “sensitive index” The Sensex has a very important function. The Sensex is supposed to be an indicator of the stocks in the BSE. It is supposed to show whether the stocks are generally going up, or generally going down.

To make it more clearly we will learn the process in few steps-

Step 1

“What is capital structure?”

This is a structure of any company’s funds or we can say from where company has collected their funds.

A company can raise their funds in two ways-

1. By issuing debenture

2. By issuing shares in market. For e.g. IPO (initial public offer)

Shares can be further classified into two parts-

1. Preference shares

2. Equity shares

Preference shares are the share which gets the preference in payment of money back at the time of dissolution of a company. And equity shares come after it. But first of all we need to give the payment of debenture holders.

Step 2

Second step is to understand the term “market capitalization”

Market cap or market capitalization is the worth of a company in terms of it’s shares. To put it in a simple way, if you were to buy all the shares of a particular company, what is the amount you would have to pay? That amount is called the “market capitalization”

Or in other words the cost of “all the shares in market “of any company is called market cap.

To calculate the market cap of a particular company, simply multiply the “current share price” by the “number of shares issued by the company”.

Depending on the value of the market cap, the company will either be a “mid-cap” or “large-cap” or “small-cap” company.

Step 3

To understand the concept of “free-float market cap”

Many different types of investors hold the shares of a company. They can be

Govt. , founders ,directors, FDI,s or employees. These types of shares is called preference share.

Now only the “open market” shares remains after this process which are free for trading by anyone in the Holdings market is called “free float share”.

According the BSE, any shares that DO NOT fall under the following criteria, can be considered to be open market shares.

· Holdings by founders/directors/ acquirers which has control element

· by persons/ bodies with "controlling interest"

· Government holding as promoter/acquirer

· Holdings through the FDI Route

· Strategic stakes by private corporate bodies/ individuals

· Equity held by associate/group companies (cross-holdings)

· Equity held by employee welfare trusts

· Locked-in shares and shares which would not be sold in the open market in normal course.

A company has to submit a complete report about “who has owns how many company’s shares” to BSE. On the basis of this BSE decide the free float factor of the company. This is very valuable number.

If you multiply the free float factor to the market cap, you will get the value of the share of the company in open market.

A simple way to understand the “free-float market cap” would be the total cost of buying all the shares in the open market.

Now we can come on “How do you find out the value of the Sensex at a particular point?”

Well, it’s pretty simple….

First: Find out the “free-float market cap” of all the 30 companies that make up the Sensex!

Second: Add all the “free-float market cap’s” of all the 30 companies!

Third: Make all this relative to the Sensex base. The value you get is the Sensex value!

The “third” step probably confused you. To understand it, you will need to understand “ratios and proportions” from 5th standard mathematics. Think of it this way:

Suppose, for a “free-float market cap” of Rs.100,000 Cr... the Sensex value is 4000…

Then, for a “free-float market cap” of Rs.150,000 Cr... the Sensex value will be..

So, the Sensex value will be 6000 if the “free-float market cap” comes to Rs.150,000 Cr!

Please Note: Every time one of the 30 companies has a “stock split” or a "bonus" etc. appropriate changes are made in the “market cap” calculations.

Now, there is only one question left to be answered, which 30 companies, why those 30 companies, why no other companies?

The 30 companies that make up the Sensex are selected and reviewed from time to time by an “index committee”. This “index committee” is made up of academicians, mutual fund managers, finance journalists, independent governing board members and other participants in the financial markets.

The main criteria for selecting the 30 stocks is as follows:

Market capitalization: The Company should have a market capitalization in the Top 100 market capitalization’s of the BSE. Also the market capitalization of each company should be more than 0.5% of the total market capitalization of the Index.

Trading frequency: The Company to be included should have been traded on each and every trading day for the last one year. Exceptions can be made for extreme reasons like share suspension etc.

Number of trades: The scrip should be among the top 150 companies listed by average number of trades per day for the last one year.

Industry representation: The companies should be leaders in their industry group.

Listed history: The companies should have a listing history of at least one year on BSE.

Track record: In the opinion of the index committee, the company should have an acceptable track record.

30 companies make up the most watched index in India – the SENSEX (SENSitive IndEX). These are the largest capitalized companies.

(In alphabetical order)

1.Associated Cement Companys Ltd.

2. Bajaj Auto Ltd.

3. Bharat Heavy Electricals Ltd.

4. Bharti Tele Ventures Ltd.

5. Cipla Ltd.

6. Dr Reddy’s Laboratories Ltd. (NYSE: RDY)

7. Grasim Industries Ltd.

8. Gujarat Ambuja Cements Ltd.

9. HDFC

10. HDFC Bank Ltd. (NYSE: HDB)

11. Hero Honda Motors Ltd.

12. Hindalco Industries Ltd.

13. Hindustan Lever Ltd.

14. ICICI Bank Ltd. (NYSE: IBN)

15. Infosys Technologies Ltd. (NASDAQ: INFY)

16. ITC Ltd.

17. Larsen & Toubro

18. Maruti Udyog Ltd.

19. National Thermal Power Corp. Ltd.

20. ONGC Ltd.

21. Ranbaxy Laboratories Ltd.

22. Reliance Energy Ltd.

23. Reliance Industries Ltd.

24. Satyam Computer Services Ltd. (NYSE: SAY)

25. State Bank of India

26. Tata Consultancy Services Limited

27. Tata Motors Ltd. (NYSE: TTM)

28. Tata Power Co. Ltd.

29. Tata Steel Ltd.

30. Wipro Ltd. (NYSE: WIT)