CORRELATION OF CORPORATE INCOME CATEGORIES AND THEIR RELATION TO COST OF CAPITAL

Balázs Kállay László Koloszár
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Balázs Kállay László Koloszár: Alexandre Lamfalussy Faculty of Economics, University of Sopron; adviser, expert

Almanach (Actual Issues in World Economics and Politics), 2017, vol. 12, issue 4, 45-58

Abstract: This paper attempts to present the correlation of the capital based enterprise income categories. Also an aim to show some methodologically wrong point of view which are widely recommended in the literature. The article uses a special graphical analytic framework developed by the authors. The paper presents the meaning of net income, earnings before interest and taxes, economic profit and market risk premium, and shows their relationships as well as their connection to the cost of capital from a microeconomic point of view and also lay out the possible corporate scenarios and a summarising illustration. The developed graphical representation framework can be applied very well also in the field of education as a comprehension-aiding tool. It is also greatly useful to understand the reasons for the connections behind the income categories, and through that o evaluate the usability of the capital-based profitability indices. The properly chosen rofitability indices help in the making of the right business decision, through it improving the competitiveness of the company.

Keywords: net income; earnings before interest and taxes; economic profit; market risk premium; cost of capital; required rate of return; weighted average cost of capital (search for similar items in EconPapers)
JEL-codes: D24 G31 M21 (search for similar items in EconPapers)
Date: 2017
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