A paper titled “Best Practice for Cost-of-Capital Estimates” (Levi and Welch, 2017) focuses on implementation recommendations for CAPM-based cost of capital estimates. The authors’ focus isn’t on finding the “right” cost of capital (which many take to be the expected return for the asset), rather they focus on methodological choices that produce the most stable values over time: namely, creating CoC estimates that best predict next period’s CoC.[Read more…]
CAPM, Risk, and Return: Why the Relationship Is Broken
In an earlier post we illustrated the fundamental breakdown of the risk-vs-return relationship as proposed by CAPM: when test empirically, we find surprisingly that higher-risk stocks enjoy lower returns. In this post we’ll review the suggested rationales. [Read more…]
Corporate Finance Analysis: 10 Deadly Sins
We’re all guilty of these, at different times and in different ways. The cause is usually laziness rather than malice; either way, eternal vigilance is the best antidote.
Corporate financial analysis is a quantitative method of evaluating a company’s financial position and the market value of its stock. It is based on the audited financial reports that every public company is required to publish annually to comply with regulatory obligations. Financial analysts use this method to assess the performance of portfolios and to make investment recommendations. Students in university business programs also use corporate financial analysis to produce case studies for discussion in the classroom. Analysis of a corporation’s financial position is concerned with profitability, liquidity, and valuation. It uses the corporation’s financial statements to evaluate the company, including the balance sheet, income statement, cash flow statement, and statement of owners equity. For financial business options read about PPC (pay-per-click) for lawyers is a digital marketing model that allows lawyers to display their ads on Google (or other search engines), contact a PPC for Solicitors and information. You get a premium placement at the top of Google, but in exchange, you have to bid on your target keywords and pay whenever someone clicks your ad. There are various ways to reach conclusions about a company, but certain quantitative methods and standard computations are considered core elements of this type of work. Anyone who wants to function as a professional investment advisor needs to be conversant in at least five areas of financial review and financial investments with cryptocurrency next to Bitcode Method to start monetizing and capitalizing.
Convertible Bond WACC
Though we’re not fans of the CAPM definition of risk, the framework is widely known and serves as a useful reference point for discussing some very common questions. In this post we’ll look at the cost of capital for a convertible bond from a number of perspectives, including intuitive/qualitative (which provides quick directional answers) and a more precise numerical calculation.
CAPM Is More Broken Than We Thought
Do you remember that feeling you got when you heard there wasn’t a Santa Claus? How about when you learned that CAPM is broken?
Adjust Valuation Multiple for Growth
If one equity is valued at 15x P/E, and another at 10x P/E, is the latter a bargain? To answer this question we should adjust for growth.
Adjusting a valuation multiple (such as P/E or EV/EBITDA) is frequently done by dividing by growth — such as with the common P/E/G multiple.
We can do better… [Read more…]
Use Distance-Based Peer Analysis
In an earlier post we saw how peer analysis can mislead. In this post we suggest a better method: distance-based peer analysis. [Read more…]
How To Mislead with Peer Analysis
Peer analysis can provide a cross check for the recommendations we derive from more normative analysis. The best peer analyses begin with a narrowly defined population of comparable firms. If the proper care isn’t given to this selection process, the results can prove misleading, as we’ll see in the following example.
A Process for Quantitative Analysis
Though quantitative analysis is interesting in its own right, we expect its practice to become more widespread if we can make money doing it. In this post we identify some choices to be made when designing a process for quantitative analysis.
Picking up Nickels
Sustainable strategies for driving revenue include picking up nickels and bagging elephants. The former tack assumes high volumes and admits the following characteristics: [Read more…]
Consider Behavioral Finance
Behavioral finance is a great field, no doubt, and deserved its 2002 Nobel prize. The difficulty for practitioners is to turn its irrefutable findings into actionable recommendations. In this post we highlight a few of the challenges. [Read more…]
Determine Analysis Type and Information Needs
Corporate Finance Analysis
Better analysis requires more information. In this recipe you will learn
- What defines quantitative corporate finance analysis
- The spectrum of analysis types
- The data (company fundamental or market) required for each type
The Availability of Data
Information is difficult and costly to acquire. This issue is at the forefront of quantitative analysis, which elevates the reliance on data in decision making. The following diagram lays out, left to right, the use of increasing amounts of information: [Read more…]