chapter 1

Profit refers to the financial gain obtained when the revenue generated from the business operations exceed the expenses and costs incurred in carrying out the business activity. In simple terms, profit is the net income of a businessman. But in Economics, profit is regarded as a factor return like wages, interest and rent. Profit is a return to the entrepreneur for the use of his entrepreneurial ability. Economic profit is the excess of total revenue of an enterprise over its total costs, which are the sum of the rent paid for land, wages paid to all employees and the interest paid for capital.

Profit plays a significant role in a free enterprise economy. It is unthinkable to have a private enterprise economy without an element of profit. Profits provide the resources for expansion and encourage entrepreneurs to increase production. Profits ensure that production is carried on efficiently and indicate which industries should expand and to what extent. The most important function of the profit is that it helps to take the risk of uncertainty. The objective of every rational business firm is the maximisation of profits.

Break even analysis (BEA) reveals the relationship between the volume and cost of production on the one hand, and the revenue and profits obtained from the sales on the other. It captures the relations of fixed cost, the value of output, sales mix prices etc., to the profitability of the company. According to Matz, Curry and Frank a break even analysis indicates at what level costs and revenue are in equilibrium. In case of break-even analysis, Break-even point is of particular importance.

Break-even point (BEP) is that point of activity where total revenue and total expenses are equal. It is the point of zero profit. In other words, BEP is that specific level of activity or volume of sales where the total cost is equal to total revenue (TC \= TR). In case, firm produces and sells less than BEP, it would incur losses; while if it produces and sell more than the level of BEP, it makes profit.

Cost of equity share capital is that part of cost of capital which is payable to equity shareholder.

Every shareholder gets shares expecting return on it. So, for company point of view, it will be cost and company must earn more than cost of equity capital in order to leave unaffected the market value of its shares.

While a firm's present cost of debt is relatively easy to determine from observation of interest rates in the capital markets, its current cost of equity is unobservable and must be estimated.

Finance theory offers various models for estimating a particular firm's cost of equity such as the capital asset pricing model, or CAPM.

Preference shares represent a special type of ownership interest in the firm. They are entitled to a fixed dividend, but subject to availability of profit for distribution.

The preference shareholders have to be paid their fixed dividends before any distribution of dividends to the equity shareholders. Cost of preference share capital is that part of cost of capital in which we calculate the amount which is payable to preference shareholders in the form of dividend with fixed rate.

Preference shares can be divided into: Irredeemable preference shares & Redeemable preference shares.

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