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…]
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.
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.
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?
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…]
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.
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…]
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…]