Term structure of interest rates
Term structure of interest rates Last time we talked about interest rates. In particular, we talked about how interest rates are quoted versus how interest rates are used to discount cash flows. We…
APR and EAR
In this topic, interest rates, I want to start off by talking about interest rate quoting conventions and I want to talk about how to compute the present value and future value…
Impact of inflation on time value of money
Impact of inflation on time value of money I want to talk about inflation and its impact on our real returns or our consumption. Let's get started. Hey, everybody. Welcome back to…
Why does money have a time unit?
Why does money have a time unit and why do we need to account for it? The answer is that there is an opportunity cost associated with not having money…
EVA a good measure of value creation
Is EVA a good measure of value creation? We have one more thing to do here, and that thing is let' s agree for just a minute that EVA is a good measure…
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…