Guide to Analysing Companies

I
INTEREST-ONLY LOAN
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Another reason for taking out an interest-only loan is when a
borrower cannot afford to repay both interest and principal but
anticipates having enough money when the loan matures to
pay it off in full.
Interim dividend
Part of a company’s dividend paid at intervals during the
year. Interim dividends are usually paid six months into the fi-
nancial year. Some US companies pay quarterly but rarely more
frequently unless, for some reason, a special dividend is de-
clared and approved by the board of directors.
Internal funds
Companies have two sources that they can turn to when they
need money:
 external funds from banks, capital markets and
shareholders;
 internal funds from their own cash flow – cash
retained within the business and not distributed to
shareholders.
Businesses that generate large amounts of cash (as distinct
from profit) are able to rely more on internal funds than
those, such as private equity companies, that have lumpy
cash flows. Companies in Anglo-Saxon countries have tradi-
tionally raised more money from their shareholders and the
capital markets. Companies in continental Europe and Japan
have closer links with their banks, which often have share-
holdings in them. As a result, such companies have relied more
on borrowings from banks for a large proportion of their exter-
nal funds.
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INTERIM DIVIDEND
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Internal rate of return
The rate of interest which would discount the flow of
revenue generated by an investment, so that the net present
value of the flow is equal to the capital sum invested. At its
simplest, the internal rate of return (irr) of a bank account
is the rate of interest received on it.
The irr is much used in appraising whether investment pro-
posals are viable. In this case, analysts examine a venture’s
income stream to arrive at the irr. This does not always give
the same result as using net present value as a yardstick. One
project can have a higher net present value than another, yet
have a lower irr.