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 also talked about how to deal with cash flow streams when the cash flows arrived more than once a year or less frequently than once a… Read More »
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 of a string of cash flow when they arrived at the irregular time, non-annual and when the compounding is not annual as well. Now, I want… Read More »
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 Corporate Finance. So last time we introduced taxes, and we explored the impact of taxes on our cost of capital, our discount rate, and our dollar investment… Read More »
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 today. Specifically, with money in hand, we can “put it to work” in a financial sense. That is, we can invest it in a savings… Read More »
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 of value creation. You do not have to agree, but just agree, bear with me for one minute. Let us say EVA is a proper way of… Read More »
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 $9 million. Therefore, from an accounting point of view, this company is making money. It is investing $100 million of capital. That capital was raised from capital providers,… Read More »
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 is not really the accounting profits that you find in any income statement, but it is just another way of calculating profit. Difference between Economic Profit… Read More »
Creating or Destroying Corporate Value Two managerial mistakes that we tend to see a lot in practice, and believe it or not there’s actually the both of them have been very widely documented, particularly the first one. Mistake number one is focusing in the short term, and particularly in announcements that have to do with short-term earnings. There is… Read More »
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 we call the cost of capital. So we will discuss the intuition and estimation of the cost of capital, then we apply that cost of capital to… Read More »
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 you expect to get $250 million a year from now. And we are still dealing; let us say with the same company that has the same discount… Read More »