EVA Example
EVA Example But very simple example just to round up the idea of whether a company is creating or destroying value. Let us consider a company that is generating a NOPAT of…
What is EVA?
What is EVA or Economic value added? EVA or Economic Value Added is a measure of profitability. As a measure of profitability, it is just another way to calculate profits. Therefore, this…
Corporate Value Creation
Corporate Value Creation Corporate Value Creation is one of those two issues that are not only important and critical for all companies, but this is also related to that extremely critical variable that…
Shortcomings of the IRR
Shortcomings of the IRR Now here is another example. Project B and Project B again you get $100 million today, you expect to put down $300 million a year from now, and…
NPV Analysis
NPV Analysis What is Discount Rate? The discount rate, in general, is the cost of capital but there might be exceptions to this. So more often than not, we can think of…
Project Evaluation
Project Evaluation As you will remember that cost of capital is the minimum required return on the company's investments and now we will discuss a little bit about how to build that…
The Debt Tax Shield
The Debt Tax Shield Let's start with the corporate tax rate, and this is just a very brief example that will show you the tax shelter, the tax break that you have…
Three Ways to Think about the Cost of Capital
Three ways to think about the Cost of Capital Many people simply refer to terms of the cost of capital as the WACC and the WACC stands for the weighted…
Diversification of portfolio
Diversification of portfolio What is a diversified portfolio? The lower the correlation between the asset that I bring and the portfolio I already have, the more I stand to gain in…
Diversification and Correlation
Relationship between Diversification and Correlation Diversification At the heart of diversification is the correlation so we cannot really separate diversification from correlation. You cannot again think about the risk of a portfolio, without…
Portfolio Correlation coefficient
Correlation Coefficient You can never build a proper portfolio if you ignore the idea of correlation. Because whether and to which degree assets move in sync, or in completely different cycles, is…
Portfolio Risk
How to calculate Portfolio Risk? There you have ten years, three assets and let us think of those as annual returns. It does not matter whether these are Dollar returns or Euro…
How to calculate beta?
How do we calculate Beta (ß)? What is Beta? Beta is not only a widely used measure of risk but also, it is the central magnitude in what we call the…
What is Risk or Volatility?
What is Risk or Volatility? In finance, risk and return go always together. You cannot really separate return from risk. These are like two sides of the same coin. You…
Arithmetic and Geometric Mean Returns
Arithmetic and Geometric Mean Returns There is more than one way of both assessing mean returns and assessing risk and we are going to look at two definitions on each side. Let's…