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CAPM Formula (Table of Contents)
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CAPM FormulaThe linear relationship between the expected return on investment and its systematic risk is represented by the Capital Asset Pricing Model (CAPM) formula.
CAPM is calculated according to the below formula:-
Ra = Expected return on an investment
Rrf = Risk-free rate
Ba = Beta of the investment
Rm = Expected return on the market
And Risk Premium is the difference between the expected return on the market minus the risk-free rate (Rm – Rrf).
Market Risk Premium
Investors expect a higher reward, known as the market risk premium, to compensate for the risk inherent in investing in the stock market compared to investing in government bonds. Therefore, the expected return on the market and the risk-free rate differ. To estimate the market rate of return, Rm, one can rely on past returns or project future returns. For example, the US treasury bills and bonds are used for the risk-free rate.
Expected Return
The “Ra” refers to the expected return of an investment over a period of time.
Risk-Free Rate
The “Rrf” denotes the risk-free rate, which is equal to the yield on a 10-year US Treasury bill or government bond. The risk-free rate is the return that an investment earns no risk, but in the real world, it includes inflation risk. When planning an investment, it is crucial to consider the risk-free rate of the country where you intend to invest and align the maturity period of the bond with your investment timeline. Typically, when estimating the risk premium, one determines the risk-free rate of return by taking the average of historical risk-free rates of return rather than relying on the current risk-free rate of return.
Beta
The CAPM formula represents Beta as “Ba,” and it demonstrates how much a security or portfolio’s price fluctuates in comparison to the overall market’s return. It calculates the investment’s volatility. Beta is a measure of systematic risk. For example, if a company’s Beta is equal to 1.7, it means it has 170% of the volatility of returns of the market average, and the stock price movements will be rather extreme. If the Beta equals 1, then the expected return on investment equals the market average return. If the Beta is -1, then it means the stock prices are less risky and volatile.
Application of the CAPM model
We will see a few examples of CAPM, which is most often used to determine an investment’s fair price. When we calculate the risky asset’s rate of return using CAPM, then that rate can also be used to discount the investment’s future cash flows to their present value and finally arrive at the investment’s fair price.
Examples of CAPM FormulaLet’s take an example to find out the CAPM for a company: –
You can download this CAPM Formula Excel Template here – CAPM Formula Excel Template
Example 1Say that Stock A is expected to bring in returns of 14% over the next year and that the current risk-free rate is 6%, and you want to calculate whether it is profitable to invest in this. You have calculated the stock’s beta value which is 1.7. The overall stock market has a beta of 1.0. This implies that the stock carries a higher level of risk than the overall risk. Therefore we expect a higher return than the market’s 14% anticipated return over the next year.
The Expected Return can be calculated as below:
Required Return (Ra) = Rrf + [Ba * (Rm – Rrf)]
Required Return (Ra) = 6% + 1.7 * (14% – 6%)
Required Return (Ra) = 6% + 13.6%
Required Return (Ra) = 19.6%
This calculation tells you that you will get 19.6 % on your investment.ca
Example 2Suppose an investor is thinking of investing in one of the three stocks available in the market. The below information is available to estimate the rate of return of the three stocks.
Stock A with a beta of 0.80
Stock B with a beta of 1.20
Stock C with a beta of 1.50
The risk-free rate is 5.00%, and the expected market return is 12.00%.
Required Return (Ra) = Rrf + [Ba * (Rm – Rrf)]
Expected Return of Stock A
E(RA) = 5.0% + 0.80 * (12.00% – 5.0%)
E(RA) = 5.0% + 5.6%
E(RA) = 10.6 %
Expected Return of Stock B
E(RB) = 5.0% + 1.20 * (12.00% – 5.0%)
E(RB) = 5.0% + 8.4%
E(RB) = 13.4 %
Expected Return of Stock C
E(RC) = 5.0 %+ 1.50 * (12.00% – 5.0%)
E(RC) = 5.0 % + 10.5%
E(RC) = 15.5%
Therefore we see that it is best to invest in stock C. The CAPM formula states that an increase in Beta results in an increase in the expected return.
Example 3Now we will see an application problem of expected return. We can calculate Net Present Value using the expected return or the hurdle rate from the CAPM formula as a discounted rate to estimate the net present value of an investment
The following information is given:
β =1.3
Rrf = 6%
Rm =13%
So the hurdle rate or expected return from the project is calculated as below:
Required Return (Ra) = Rrf + [Ba * (Rm – Rrf)]
Ra = 6% + 1.3 * (13%- 6%)
Ra = 6% + 9.1%
Ra = 15.1%
Information specific to the project you plan to invest in is as follows. The figures are in lakhs:
Initial Investment= ₹5,000
Expected payments done: ₹ 6,000 in 2nd year, ₹ 5,000 in 5th year
Net Present Value Calculation (NPV): Taking into note the time value of money, we calculate the NPV as below:
Npv = – initial investment +summation of ( value of investment/ (1+ rate)^ chúng tôi years)
The investor made a first investment of 5000, followed by a second-year investment of 6000, and a third investment of 5000 in the 5th year. Just put the values to get the results.
NPV = -5,000 +( 6,000/1.151^2 )+ (5000/1.151^5 )
NPV = ₹ 2004.085713
Assumptions of CAPM Formula
Investors hold diversification across a range of investments, so they eliminate unsystematic risk.
Investors can lend and borrow any amount under the risk-free rate.
CAPM considers a market ideal and does not include taxation or transaction costs in an account.
Assume all information is available at the same time to all investors.
Every investor is against risk exposure.
LimitationsThe limitation of this CAPM formula is the higher the risk of the asset, the greater the expected return, which is not always true.
CAPM Formula CalculatorYou can use the following CAPM Calculator
Rrf (%) Ba Rm (%) Ra
Ra =
Rrf + [Ba X (Rm – Rrf)]
0
+ [
0
X (
0
–
0
)] =
0
CAPM Formula in Excel (With Excel Template)
Here we will do the same example of the CAPM formula in Excel. It is very easy and simple. You need to provide the three inputs, i.e., Risk-free rate, Beta of the investment, and Expected return on the market.
You can easily calculate the CAPM using the formula in the template provided.
The Expected Return can be calculated as below:
We can calculate the Expected Return of each stock with the CAPM formula.
The expected return from the project is calculated as below:
The net value of the investment is calculated as follows:
Recommended ArticlesThis has been a guide to a CAPM formula. Here we discuss its uses along with practical examples. We also provide you with CAPM Calculator with a downloadable Excel template. You may also look at the following articles to learn more –
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Difference Between Spiral Model And Waterfall Model
Both the Spiral Model and the Waterfall Model are widely used development methodologies in the software industry. Both of these models are practices for better tracking and have application development in systematic way. The basic difference between spiral model and waterfall model is that the spiral model works in evolutionary method and generally used by developers, whereas the waterfall model works in a sequential method and generally used by customers.
In this article, we will discuss the important differences between spiral model and waterfall model. But before going into the differences, let’s start with some basics of these two models.
What is the Spiral Model?Spiral Model is the development model in which the entire model is divided into various subdevelopment phases where corresponding testing phase for each development phase is practices. The spiral model is generally used by the developers of the application. In the spiral model, the early stage planning is not required. It is mainly used with large projects.
What is the Waterfall Model?The waterfall model works in the sequential method and is generally used by customers. It requires early-stage planning. Waterfall model is the first development of an application, after which the application is tested.
In the Waterfall model, the errors and risks are determined and removed after the stages are completed. It is suitably used with small projects because it is less flexible, difficult to change, and involves high amount of risk. But, it is relatively less expensive than spiral model.
Difference between Spiral Model and Waterfall ModelThe following table compares and contrasts the different features of the Spiral model and the Waterfall model −
Factor Spiral Model WaterFall Model
Definition In other words, we can say that for every stage in the development cycle, there is an associated testing phase and corresponding testing phase of the development phase is planned in parallel. In other words, we can say that the complete process is divided into several phases among which one phase should be completed in order to reach the next phase and testing is almost at end phase of the development.
Type/Nature As mentioned above that in Spiral Model the execution of the phases i.e., development and testing happens in a sequential manner, so the type of Spiral Model is evolutionary in nature. Waterfall Model is a relatively linear sequential design approach as each phase should be completed in order to reach the next phase. So the type of this model is Continuous in nature.
Testing and Validation In the Spiral Model each development phase get tested at its own level and hence no pending testing occurs in this model also if any validation requires to be implemented then it could be implemented at that phase. In case of Waterfall Model, the testing occurs after development is completed and thus if any missing validation is identified to be implemented then first that phase of development needs to be recognized and then that validation get implemented.
Cost and Complexity As sequential phases need to be functional hence the cost is higher as compared to that of WaterFall Model also the complexity is more than WaterFall. In the Waterfall Model, due to linear development only one phase of development is operational and hence cost and complexity is low as compared to that of Spiral Model.
Defects In the Spiral Model the probability of total number of defects in the development of application is low as testing is done in parallel to the development. In the Waterfall Model, the probability of total number of defects in the development of application is high as testing is done post development.
ConclusionThe most significant difference that you should note here is that the spiral model is generally used by developers, whereas the waterfall model is used by customers.
Fixed Asset Turnover Ratio Formula
Fixed Asset Turnover Ratio Formula (Table of Contents)
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What is the Fixed Asset Turnover Ratio Formula?The term “Fixed Asset Turnover Ratio” refers to the operating performance metric that shows how efficiently a company is utilizing its fixed assets (machinery and equipment) to generates sales. In other words, this ratio is used to determine the amount of dollar revenue generated by each dollar of available fixed assets.
Fixed Asset Turnover Ratio = Net Sales / Average Net Fixed Assets
Example of Fixed Asset Turnover Ratio Formula (With Excel Template)Let’s take an example to understand the calculation of the Fixed Asset Turnover Ratio in a better manner.
You can download this Fixed Asset Turnover Ratio Formula Excel Template here – Fixed Asset Turnover Ratio Formula Excel Template
Fixed Asset Turnover Ratio Formula – Example #1Let us take the example of two companies ABC Inc. and XYZ Inc. to illustrate the concept of fixed asset turnover ratio. Both companies belong to the same industry of ice cream manufacturing. Calculate the fixed assets turnover ratio of both of those businesses on the basis of the above-given information. Also, calculate which company utilizes its fixed assets better. According to the latest annual reports, the following information is available:
Solution:
Average Net Fixed Assets is calculated using the formula given below
Average Net Fixed Assets = (Opening Net Fixed Assets + Closing Net Fixed Assets) / 2
For ABC Inc.
Average Net Fixed Assets = ($20 million + $24 million) / 2
Average Net Fixed Assets = $22 million
For XYZ Inc.
Average Net Fixed Assets = ($22 million + $26 million) / 2
Average Net Fixed Assets = $24 million
Fixed Asset Turnover Ratio is calculated using the formula given below
Fixed Asset Turnover Ratio = Net Sales / Average Net Fixed Assets
For ABC Inc.
Fixed Asset Turnover Ratio = $50 million / $22 million
Fixed Asset Turnover Ratio = 2.27x
For XYZ Inc.
Fixed Asset Turnover Ratio = $70 million / $24 million
Fixed Asset Turnover Ratio = 2.92x
Fixed Asset Turnover Ratio Formula – Example #2Let us take Apple Inc.’s example now’s the annual report for the year 2023 and illustrate the computation of the fixed asset turnover ratio. During the year, the company booked net sales of $260,174 million, while its net fixed assets at the start and end of 2023 stood at $41,304 million and $37,378 million respectively. Calculate Apple Inc.’s fixed assets turnover ratio based on the given information.
Solution:
Average Net Fixed Assets is calculated using the formula given below
Average Net Fixed Assets = (Opening Net Fixed Assets + Closing Net Fixed Assets) / 2
Average Net Fixed Assets = ($41,304 million + $37,378 million) / 2
Average Net Fixed Assets = $39,341 million
Fixed Asset Turnover Ratio is calculated using the formula given below
Fixed Asset Turnover Ratio = Net Sales / Average Net Fixed Assets
Fixed Asset Turnover Ratio = $260,174 million / $39,341 million
Fixed Asset Turnover Ratio = 6.61x
Source Link: Apple Inc. Balance Sheet
ExplanationThe formula for Fixed Asset Turnover Ratio can be calculated by using the following steps:
Step 1: Firstly, determine the value of the net sales recognized by the company in its income statement for the given period.
Step 2: Next, the value of net fixed assets of the company at the beginning of the period (opening) and at the end of the period (closing). Now, compute the average net fixed assets for the given period based on the opening and closing value of the net fixed assets.
Average Net Fixed Assets = (Opening Net Fixed Assets + Closing Net Fixed Assets) / 2
Step 3: Finally, the formula for the fixed asset turnover ratio can be derived by dividing net sales (step 1), as shown below, by the average net fixed assets (step 2).
Fixed Asset Turnover Ratio = Net Sales / Average Net Fixed Assets
Relevance and Use of Fixed Asset Turnover Ratio FormulaIt is important to understand the concept of the fixed asset turnover ratio as it was helpful in assessing the operational efficiency of a company. This ratio is primarily applicable for manufacturing-based companies as they have huge investments in plant, machinery, and equipment and as such fixed assets’ utilization is critical for their business well-being. The ratio can be used by investors and analysts to compare the performances of companies operating in similar industries.
Although it is a very useful metric, one of the major flaws with this ratio is that it can be influenced by manipulating the depreciation charge as the ratio is calculated based on the net value of fixed assets. So, the higher the depreciation charge, the better will be the ratio and vice versa.
Fixed Asset Turnover Ratio Formula Calculator
Net Sales Average Net Fixed Assets Fixed Asset Turnover Ratio Fixed Asset Turnover Ratio = Net Sales /Average Net Fixed Assets =
0
/
0
=
0
Recommended Articles
This is a guide to Fixed Asset Turnover Ratio Formula. Here we discuss how to calculate the Fixed Asset Turnover Ratio along with practical examples. We also provide a Fixed Asset Turnover Ratio calculator with a downloadable excel template. You may also look at the following articles to learn more –
Free Small Business Budget Template
Creating a budget for your business may seem like a daunting task, but it’s a vital step in your business’s development. In fact, you’ll probably need one as part of your business plan. A business budget can take multiple forms. At its most basic level, it is a document that shows how much money you have coming in and what you need to spend money on. It also shows how much money you will need to make to continue making a profit and satisfy your expenses.
How do you create a startup business budget?If your business is new or still in the planning stages, creating a budget is tricky – even with a template – because you don’t have actual numbers to plug in. Still, it’s something you need for your business plan.
This is especially important if you’re planning to apply for a small business loan to help you launch your business. Here are five steps to help you create a startup budget so you can start your business off on the right foot.
1. Set your budget goal.Your budget goal is the total amount you are willing to spend on your business. This helps you establish clear parameters for your budget from the beginning and keep your spending in check.
To set your goal, consider the amount of money you currently have or can realistically obtain. How much makes sense for you to spend? Keep in mind that loans must be paid back, often with interest, and you must not deplete your personal savings. [Read related article: How to Decide Which Type of Business Loan Is Right for You]
2. Categorize your expenses.For this step, start by brainstorming all of your potential expenses on a budget worksheet. Begin with your startup costs, which are any one-time expenses related to starting your business.
This could include things like a building (if you’re buying, not renting), computers and photography equipment. Be specific and write down the exact costs of every item you will need to purchase and any associated costs. For example, to build a website, you will need to pay for a designer, host, domain name, plugins, stock photos, and security software.
Next, categorize each item as “essential,” “nonessential” or “later.” Essential items, as the name suggests, are purchases that are crucial to getting your business off the ground, such as a business license.
Nonessential items are things that will make your life easier but are not crucial to the operation of your business. This can be subjective, but try to look at your business as a whole and use your best judgment.
FYI
An example of a nonessential item would be a professionally designed logo or website.
What does a business budget template include?If you’ve never used a business budget template before, you may feel slightly confused. Our budget template comes with five tabs. To get started, rename the first tab with your business’s name.
Once you do that, it will automatically fill in the other pages. Let’s look at a breakdown of each of the other four main tabs:
Annual budgetThe annual budget tab looks at how much money your business brings in each year. Use this tab to input your company’s yearly revenue and expenses. You want to be as specific and detailed as possible because this information is used throughout the budget template.
Monthly budgetThe monthly budget tab looks at your monthly expenses. You’ll notice that since you already filled out the annual budget tab, that information has been prorated, so you have monthly estimates for each of your yearly totals.
Each month’s budget is weighted equally by default, but you can change this by updating the percentages in line 5. Just keep in mind that your percentages must add up to 100.
Monthly actualsThe monthly actuals tab is used to track your actual expenses and revenue as they come in each month. This lets you see how much money your business is bringing in.
OverviewFinally, the overview tab shows how your actual numbers compare to your budget. It gives an overview of your annual and monthly budgets. This information helps you to see where your business is doing well and to identify areas for improvement.
To see your finances for a particular month, you can select that month from the dropdown list in line 4.
Editor’s note: Looking for the right accounting software solution for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.
Why do you need a business budget template?A business budget template is vital to keep your expenses and financial goals up to date. A good template makes it easy for you to see how much money you have available, what you need to pay for, and how much money you have left after covering your necessary expenses.
It will show you if you can grow your business, give yourself or your employees raises, and purchase inventory and assets. If you don’t have sufficient money coming in, it will show you which bills you don’t have the funds to pay or if you are nearing bankruptcy.
If you need to apply for loans or grants, the applications may ask you for a monthly or annual budget, as well as an income statement or balance sheet, to give the lender an idea of where your business stands financially and how you manage your money.
For these reasons, it is in your best interest to have an up-to-date budget from the beginning.
Kiely Kuligowski contributed to the writing and research in this article.
How To Build A Javascript Calculator?
Introduction to JavaScript Calculator
The Basic intention at the end of this article is to create a simple calculator with the help of JavaScript which can perform all the basic arithmetic operations. Only the key is a valid expression should be passed via input keys to see the results on the output screen.
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An Example is: 42 + 15
In order to build a valid expression, we should be informed about few things i.e. the first input (42), the second input (15) and the operator pressed (+).
Hence, we’ll start with building an object ‘CALC’ which will keep info about all the above three things.
const calc = { dispValue: '0', firstInput: null, waitForSecondInput: false, operator: null, };The CALC object have all the necessary attributes to check whether a valid expression is passed. Here, dispValue will hold the string value to be shown on the screen, firstInput will hold the first input value, waitForSecondInput is a flag that will check whether the expression is fine or another input needs to be entered, and operator attribute will hold value of operator.
How to Build a JavaScript Calculator?How to build a javascript calculator? are explain below:
Updating the Display ScreenInitially, the calculator screen will show nothing. We need to pull the value of dispValue attribute on the calculator screen which should be ‘0’ by default. In order to perform the above operation well, we will define a function which will update the value of the screen with the dispValue content. This function will be called whenever there is a need to change the display content within the app.
function updateDisp() { const disp = document.querySelector('.calc-screen'); disp.value = calc.dispValue; } updateDisp(); Managing the Key Presses const keys = document.querySelector('.calc-keys'); const { choosen } = event; if (! choosen.matches('button')) { return; } if (choosen.classList.contains('operator')) { console.log('operator', choosen.value); return; } if (choosen.classList.contains('decimal')) { Console.log('decimal', choosen.value); return; } if (choosen.classList.contains('all-clear')) { Console.log('clear', choosen.value); return; } console.log('number', choosen.value); }); Updating the Screen with the DigitsHere we will visualize the input digits of the user on the calculator screen.
function inputNumber(number) { const { dispValue, waitForSecondInput } = calc; if (waitForSecondInput === true) { calc.dispValue = number; calc.waitForSecondInput = false; } else { calc.dispValue = dispValue === '0' ? number : dispValue + number; } console.log(calc); } Next, replace console.log('number', choosen.value); in the eventlistener block with the following: inputNumber(choosen.value); updateDisp(); Handling a Decimal Key function inputDecimal(val) { if (!calc.dispValue.includes(val)) { calc.dispValue += val; } }Then replace console.log(‘decimal’, choosen.value); in the eventlistener block with the following code:
inputDecimal(choosen.value); updateDisp(); Managing the OperatorsWhen the user enters the first input and presses any operator:
This stimulates us that the user is all set to input the second number. Hence now we need to save the first number provided by the user and update the calculator display with the relevant number.
function manageOperator(Oper) { const { firstInput, dispValue, operator } = calc const input = parseFloat(dispValue); if (firstInput === null) { calc.firstInput = input; } calc.waitForSecondInput = true; calc.operator = Oper; }Then replace console.log(‘operator’, choosen.value) in the eventlistener block with the following code:
handleOperator(choosen.value); updateDisplay();When the user enters the first input and presses any operator:
Now the second case is when the user has pressed the second input number and after that an operator button is pressed. So now we have all the values for a valid expression hence we’ll calculate the result and store it in the firstInput attribute and display it on the calculator screen.
Now we’ll modify the function manageOperator accordingly:
function manageOperator(Oper) { const { firstInput, dispValue, operator } = calc const input = parseFloat(dispValue); if (firstInput == null) { calc.firstInput = input; } else if (operator) { const output = performCalc[operator](firstInput, input); calc.dispValue = String(output); calc.firstInput = output; } calc.waitForSecondInput = true; calc.operator = Oper; console.log(calc); }Then we’ll create a new object named as performCalc below manageOperator with the listed attributes:
const performCalc = { };The else if statement attached to manageOperator Function validates if an operator is present already. If yes, then property lookup is executed for the particular operator in the performCalc object and the function matching the operator is then executed.
Output:
ConclusionThis is an exert for making a good working calculator with the help of JavaScript. The HTML and CSS part needs to be written separately for the look and feel part of the app. The above calculator can be made more realistic with adding further functionalities such as when the user enters two operators what to do then, adding operators such as % can make it more like of your android or iPhone like calculator app.
Recommended ArticlesThis is a guide to JavaScript Calculator. Here we also discuss the definition and Top 4 Versions of CodeIgniter along with an explanation. You may also have a look at the following articles to learn more –
How To Calculate Capital Loss With Examples?
Definition of Capital Loss
Capital Loss is the loss arising from selling assets other than business inventory at a price less than the asset’s Book value. It is realized when the asset is sold or disposed of.
The loss realized can be set off against short-term or long-term capital gains depending upon the capital loss, whether short-term or long-term, based on the actual holding period and varies for different jurisdictions and asset classes. In short, the loss can be offset only against Capital Gain as against other Business Income.
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ExplanationSale of a Capital Asset below the purchase price results in a Capital Loss. It can take the form of a Short Term (if the holding period is less than three years) or a Long term ( if the holding period is more than three years). Also, when assessing the Purchase Price of a Capital asset, it is permissible to do indexation to account for the inflation over the period.
The period to differentiate between short-term and long-term capital losses varies and is not standard, as mentioned above. In some jurisdictions and certain capital assets, a short-term period refers to less than one year; above one year is categorized as Long Term. It depends from jurisdiction to jurisdiction. Further capital losses can be carried forward for a stipulated number of years and can be set off depending on the following:
Short Term Capital Loss can be adjusted against both Short term gain as well as Long term gain.
Long-term Capital Loss can be adjusted only against Long Term Capital gain.
The formula for Capital Loss:
Capital loss =Purchase Price – Sale Price
The purchase price is accounted for inflation by indexing the same to adjust for the price inflation over the period.
How to Calculate Capital Loss?It is computed using multiple steps, namely:
Calculate the original acquisition cost of the Capital Asset and all capitalized expenses.
Indexation of the Acquisition cost computed in the above step to the year of sale. This step is undertaken to account for inflation.
We are determining the Sale Price of the Capital Assets after deducting all expenses incidental to the sale of the Assets.
Subtracting the Sale Price from the Net Acquisition cost after indexation. A negative figure implies Capital Losses.
This standard methodology adopted for the computation of Capital Loss may vary in the case of a particular class of capital Assets. Also, in the case of Financial Instruments such as Bonds, Equities the concept of indexation is not to be applied, and it is directly computed after adjusting for Acquisition Cost.
Examples of Capital Loss Example #1Ryan purchased 1000 shares of Apple Inc in 2014 when the price per share was $12 and incurred a $1 per share in the form of brokerage. He decided to sell these shares in 2023 when the price of shares had fallen to $10 due to some medical emergency at his home and incurred a $0.5 per share in the form of the brokerage on the sale of such shares. Based on the same Capital Loss is shown below:
Acquisition Cost in 2014
Number of shares purchased in 2014 (a) 1000
Purchase Price per share (b) $12
Brokerage Cost incurred per share (c) $1
Total Acquisition cost per share (d) = (c) +(b) $13
The total Acquisition cost of 1000 shares (e) = (d) * (a) $13,000
Sale consideration in 2023
Sale Price Per share (a) $10
Brokerage cost incurred per share (b) $0.50
Net Sale consideration received per share (c) = (a) – (b) $9.50
No. of shares sold (d) 1000
Total Sale Consideration received (e) = (d) * (c) $9,500.00
Capital Loss ($9,500.00 – $13,000 ) $3,500.00
Example #2ABC Limited purchased a Land parcel in 2013 and developed a building. The land cost at that time was $100000, and ABC Limited incurred $40000 in the development of the Building. In 2023 ABC Limited sold the piece of land along with the Building at a combined cost of $170000.Based on the same, compute the capital losses.
The Indexation of 2013-14 is 142, and 2023-20 is 187.
Cost of Land (a) $100,000
Building Development Cost (b) $40,000
Total Acquisition cost including Building Development (c) = (b) + (a) $140,000
Indexation in 2013-14 (d) 142
Indexation in 2023-20 (e) 187
Indexed Cost of Acquisition in 2023-20 for Capital gain/loss computation (f) = (c) * [(e) / (d)] $184,366
Sale consideration in 2023
Sale Price Received (a) $170,000
Brokerage and Processing Charge (b) $0
Net sale consideration received (c) = (b) * (a) $170,000
Capital Loss ($184,366 – $170,000) $14,366
ImportanceIt is essential as it is a permissible item in tax computation, and businesses can adjust it against Capital gain, thereby reducing their total tax liability.
Advantages
It can be set off against capital gain, which can help reduce tax liability.
It can be carried forward for many years, which varies for different countries. Usually, the period is eight years which means that the loss can be recovered against a capital gain in the future.
ConclusionIt is a common aspect found in the sale of capital assets. It happens when the consideration received on selling such assets is less than the acquisition cost, resulting in capital loss. Unlike business loss, it cannot be directly adjusted from Business Income. It can be changed only from capital gain (short-term or long-term, depending upon the type of capital losses). It can be carried forward for several years, which varies from jurisdiction to jurisdiction as per the prevalent income tax laws. Also, while calculating it, one must adjust the cost acquisition to account for indexation to realize the true capital gain or a capital loss. Despite the clarity, multiple challenges are involved in filing capital losses in income tax returns, and one needs to avail the services of a certified tax planner to assess capital losses correctly, following the income tax guidelines on capital gains and losses.
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