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 this as the cost of capital for companies that are operating in just one country, or companies that have only one division, or manufacture only one specific… Read More »
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 cost of capital into a rule to decide whether you should go ahead with the project or not. Also, we will discuss the two most widely used… Read More »
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 when you get debt in your capital structure. No Debt With Debt $200.0 $200.0 $100.0 $100.0 $100.0 $100.0 $0.0 $8.0 $100.0 $92.0 $35.0 $32.0 $65.0… Read More »
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 average cost of capital. More often than not when in finance we call an average of something, we typically mean a weighted average and weighted basically means,… Read More »
What is the Cost of Capital? Corporations and investors need to interact in a market because investors are the ones that provide the capital so that the corporations can invest and produce the goods and services How do investors think about other investments? How they evaluate investments in terms of returns? How they evaluate investments in terms of… Read More »
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 terms of diversification. Let us suppose we form two portfolios. Portfolio number one. Here we are going to put the US, and Canada, and Germany, and the UK,… Read More »
What is Diversification? Diversification The goal of diversification The ultimate goal of diversification is to maximize, to get the highest possible risk-adjusted returns. When I do diversify a portfolio, would I obtain as a result is a possibility of choosing the combination that gives me the highest, Risk-adjusted return? So, not only the goal of diversification is obtaining the highest… Read More »
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 thinking the impact of correlation, and that is the relationship between the behaviors of the assets in the portfolio. Now, one or a couple of important… Read More »
Correlation Matrix What is Correlation Matrix? A correlation matrix is simply a collection of correlations and some of those numbers may not be large enough for you to see all of them, and some of them are very dark. The ones that are very dark are numbers, which are higher than 0.75 and that does not really matter… Read More »
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 what is going to determine how much you can diversify your portfolio and again, we have not quite defined this concept of diversification just yet. The… Read More »