Difference between Accounting Profit and Economic Profit How does economic profit differ from accounting profit? Here is a very simple example that reflects the difference between accounting profits and economic profits and, and thinking properly or improperly about the process of value creation. That is, suppose that as a company, you invest $1 billion in R&D, big amount of… Read More »
Value Based Management VBM stands for Value-based management. There are many ways of defining but Value-based management at the end of the day is two things: Number one is trying to find a variable that you can use to determine whether a corporation is creating or destroying value. And I am trying to find a variable because,… Read More »
Who are the Stakeholders? Stakeholders are more or less by definition anybody that has a role to play in the process of value creation. So besides the shareholders, the employees have a role to play, the suppliers have a role to play, the society in which the company does business; they have a role to play. In other words, stakeholders… Read More »
Overbought Position Overbought means that a bank’s assets and purchases of a particular foreign currency exceed its liabilities and sales of that currency. Oversold Position Oversold means that a bank’s liabilities and sales in a particular foreign currency exceeds the assets and purchases of that currency. In order to avoid risk on account of exchange… Read More »
Sensitivity Analysis Today I want to turn to sensitivity analysis. In other words, having set up our DCF and having completed all the inputs, now, let’s push it around a little bit and just see how robust and sensitive our valuation is. So we can make the most informed decision possible. So let’s get started. And we’re going to start with… Read More »
Decision criteria and free cash flow Last time we applied our forecast drivers to our free cash flow formula to forecast free cash flows for our tablet project. Today I want to take those free cash flows and apply our different decision criteria to come up with decisions regarding our project. In particular, we asked, what do we do with… Read More »
Forecasting free cash flows Today, I want to apply the forecast drivers to the free cash flow formula to forecast free cash flows into the future for the tablet project. Today we are going to be talking about forecasting free cash flows. Today I want to apply those forecast drivers to actually forecast dollar cash flow. Dollar free… Read More »
Free Cash Flows Today I want to talk about free cash flows, a critical element in implementing any of those decision rules. Remember, there are two components to NPV. There are Free Cash Flows, and there is a discount rate, because NPV if you recall from last time, is little more than just a discounted stream of cash… Read More »
Components of free cash flow What I want to do in this lecture is talk about forecast drivers, or the assumptions required to forecast each component of the free cash flow formula out into the future. And we are going to do it by way of a specific example. So let’s get started. So imagine we are a company… Read More »
Return on investment – ROI Today I want to talk about return on investment and in particular, what I want to discuss is the strengths and weaknesses of the internal rate of return relative to the net present value rule. So let’s get started. Today we are turning to a new topic, return on investment. But before diving in… Read More »