In economics, inflation is a rise in the general level of prices of goods and services in an

economy over a period of time.[1] When the general price level rises, each unit of currency buys
fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing
power of money – a loss of real value in the internal medium of exchange and unit of account in
the economy.[2][3] A chief measure of price inflation is the inflation rate, the annualized
percentage change in a general price index (normally the Consumer Price Index) over time.[4]

Inflation's effects on an economy are various and can be simultaneously positive and negative.
Negative effects of inflation include a decrease in the real value of money and other monetary
items over time, uncertainty over future inflation may discourage investment and savings, and
high inflation may lead to shortages of goods if consumers begin hoarding out of concern that
prices will increase in the future. Positive effects include ensuring central banks can adjust
nominal interest rates (intended to mitigate recessions),[5] and encouraging investment in non-
monetary capital projects.

Economists generally agree that high rates of inflation and hyperinflation are caused by an
excessive growth of the money supply.[6] Views on which factors determine low to moderate
rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in
real demand for goods and services, or changes in available supplies such as during scarcities, as
well as to growth in the money supply. However, the consensus view is that a long sustained
period of inflation is caused by money supply growing faster than the rate of economic growth.[7]
[8]

Today, most mainstream economists favor a low, steady rate of inflation.[9] Low (as opposed to
zero or negative) inflation may reduce the severity of economic recessions by enabling the labor
market to adjust more quickly in a downturn, and reduce the risk that a liquidity trap prevents
monetary policy from stabilizing the economy.[10] The task of keeping the rate of inflation low
and stable is usually given to monetary authorities. Generally, these monetary authorities are the
central banks that control the size of the money supply through the setting of interest rates,
through open market operations, and through the setting of banking reserve requirements.[11]

The rate at which the general level of prices for goods and services is rising, and, subsequently,
purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation,
in an attempt to keep the excessive growth of prices to a minimum.
EBIT/EPS ANALYSIS

Glossary

EBIT - Earnings Before Interest and Taxes.  Accountants like to use the term Net Operating
Income for this income statement item, but finance people usually refer to it as EBIT
(pronounced as it is spelled - E, B, I, T).  Either way, on an income statement, it is the amount of
income that a company has after subtracting operating expenses from sales (hence the term net
operating income).  Another way of looking at it is that this is the income that the company has
before subtracting interest and taxes (hence, EBIT).

EAT - Earnings After Taxes.  Accountants call this Net Income or Net Profit After Taxes, but
finance people usually refer to it as EAT (pronounced E, A, T).

EPS - Earnings Per Share.  This is the amount of income that the common stockholders are
entitled to receive (per share of stock owned).  This income may be paid out in the form of
dividends, retained and reinvested by the company, or a combination of both. (It is pronounced
E, P, S).

The Analysis

I need to raise additional money by issuing either debt, preferred stock, or common stock.  
Which alternative will allow me to have the highest earnings per share?

This question calls for an EBIT/EPS analysis.  Simply put, this simply means that we will
calculate what our earnings per share will be at various levels of sales (and EBIT).

Actually, it isn't necessary to start with sales.  Since a company's EBIT, or net operating income,
isn't affected by how the company is financed, we can skip down the income statement to the
EBIT line and begin there.  In other words,

1. we assume a certain level of sales,

2. calculate our estimated EBIT at that level, and
3. then calculate what our EPS will be for each alternative form of financing (debt,
preferred stock, and common stock).

An Illustration

For example, let's assume that the company:

1. is currently financed entirely with common stock (i.e., no debt and no preferred stock). 
The firm has 2,000 shares of common stock outstanding.
2. currently pays no common stock dividend; all earnings are retained and reinvested into
the company.
 3. needs to raise $50,000 in new money.  As financial manager, you want to know which
financing alternative should be used.
4. is in the 35% tax bracket.

To raise the $50,000, you are considering three alternatives:

1. common stock - The company can sell additional shares at the current price of $50 per
share.  This means that 1,000 new shares of common stock will need be to be sold
($50,000/$50 per share).
2. preferred stock - The dividend yield on preferred stock will have to be 7.3% of the
amount of money raised.  (The preferred can be sold for $40 per share.) The number of
shares of common stock will remain unchanged.
3. debt - The interest rate on any new debt will be 4% per year.  The number of shares of
common stock will remain unchanged.

ANNUITY DUE

Annuity-due

An annuity-due is an annuity whose payments are made at the beginning of each period.[4]
Deposits in savings, rent or lease payments, and insurance premiums are examples of annuities
due.

Because each annuity payment is allowed to compound for one extra period, the value of an
annuity-due is equal to the value of the corresponding ordinary annuity multiplied by (1+i).
Thus, the future value of an annuity-due can be calculated through the formula (variables named
as above):[3]

(annuity notation)

It can also be written as

(1 + i)

An annuity-due with n payments is the sum of one annuity payment now and an ordinary annuity
with one payment less, and also equal, with a time shift, to an ordinary annuity with one payment
more, minus the last payment.
Thus we have:

(value at the time of the first of n payments of 1)

(value one period after the time of the last of n

payments of 1)

Formula for Finding the Periodic payment(R), Given A:

R = A/(1+〖(1-(1+(j/m) )〗^(-(n-1))/(j/m))

Examples: 1. Find the periodic payment of an annuity due of $70000, payable annually for 3
years at 15% compounded annually. R= 70000/(1+〖(1-(1+((.15)/1) )〗^(-(3-1))/((.15)/1)) R =
70000/2.625708885 R = $26659.46724

2. Find the periodic payment of an annuity due of $250700, payable quarterly for 8 years at 5%
compounded quarterly. R= 250700/(1+〖(1-(1+((.05)/4) )〗^(-(32-1))/((.05)/4)) R =
250700/26.5692901 R = $9435.71

Finding the Periodic Payment(R), Given S:

R = S\,/((〖((1+(j/m) )〗^(n+1)-1)/(j/m)-1)

Examples: 1. Find the periodic payment of an accumulated value of $55000, payable monthly for
3 years at 15% compounded monthly. R=55000/((〖((1+((.15)/12) )〗^(36+1)-1)/((.15)/12)-1) R
= 55000/45.67944932 R = $1204.04

2. Find the periodic payment of an accumulated value of $1600000, payable annually for 3 years
at 9% compounded annually. R=1600000/((〖((1+((.09)/1) )〗^(3+1)-1)/((.09)/1)-1) R =
1600000/3.573129 R = $447786.80

ANNUITY

The term annuity is used in finance theory to refer to any terminating stream of fixed payments
over a specified period of time. This usage is most commonly seen in discussions of finance,
usually in connection with the valuation of the stream of payments, taking into account time
value of money concepts such as interest rate and future value.[1]
Examples of annuities are regular deposits to a savings account, monthly home mortgage
payments and monthly insurance payments. [2]Annuities are classified by payment dates. The
payments (deposits) may be made weekly, monthly, quarterly, yearly, or at any other interval of
time.

An annuity is an investment that you make, either in a single lump sum or through installments
paid over a certain number of years, in return for which you receive back a specific sum every
year, every half-year or every month, either for life or for a fixed number of years.

After the death of the annuitant, or after the fixed annuity period expires for annuity payments,
the invested annuity fund is refunded, perhaps along with a small addition, calculated at that
time.

Annuities differ from all the other forms of life insurance discussed so far in one fundamental
way - an annuity does not provide any life insurance cover but, instead, offers a guaranteed
income either for life or a certain period.

Typically annuities are bought to generate income during one’s retired life, which is why they
are also called pension plans. Annuity premiums and payments are fixed with reference to the
duration of human life. Annuities are an investment, which can offer an income you cannot
outlive and provide a solution to one of the biggest financial insecurities of old age; namely, of
outliving one’s income.