Free cash flow (FCF) or free cash flow to firm (FCFF) Free cash flow (FCF) or free cash flow to firm (FCFF) is a measure of a company’s financial performance, calculated as operating cash flow minus capital expenditures. FCF represents the cash that a company is able to generate after spending the money required to maintain or expand its asset
Continue reading Weighted average cost of capital (WACC) Weighted average cost of capital (WACC) is a calculation of a firm’s cost of capital in which each category of capital is proportionately weighted. Companies raise money from all sources of capital, including common stock, preferred stock, bonds and any other long-term debt, are included in a WACC calculation. Different securities are expected to generate different returns. The weighted average cost of capital (WACC) is the rate
Continue reading Capital Asset Pricing Model (CAPM) The capital asset pricing model (CAPM) is a model used to determine a theoretically appropriate required rate of return of an asset, and it is related with a well-diversified portfolio. The CAPM formula is: ra = rrf + Ba (rm-rrf) where: rrf = the rate of return for a risk-free security rm = the broad market’s expected rate of return Ba = beta of the asset The model takes into account the asset’s sensitivity to
Continue reading Cost of redeemable debt Redeemable debts are those which will be repaid to the debt investors after a specific period, while irredeemable or perpetual debt is not repaid back to the debt investors—only interest on this is paid regularly. If debt is redeemable, the cost of debt is calculated as the redemption yield on the debt. The redemption yield is
Continue reading Cost of irredeemable debt Irredeemable debt is debt that has no specific redemption date or maturity period. The issuing authority or entity pays a specified interest rate periodically but provides no data on when principal will be returned. Another name for irredeemable debt is perpetual debt or consol. As long as a company or other issuing entity does not default
Continue reading What is Cost of Equity? The cost of equity is the return ( rate of return) a company pays to its equity investors or shareholders to compensate for the risk they undertake by investing their capital. The equity investors seek dividends and/or appreciation in the value of their investment (capital gain on share price). The current cost of equity is unobservable and must be
Continue reading What is Capital Rationing? Capital rationing is restricted on the amount of new investments or projects undertaken by a company.There are two types of capital rationing. The first type of capital rationing is referred to hard capital rationing.This occurs when a company faces issues raising additional funds, either through debt or equity. The rationing arises from an external factors , and
Continue reading What is Value at risk Value at Risk (VaR) is a measure of the risk of investments. It estimates how much a set of investments might lose, given normal market conditions, in a set time period such as a day. VaR is defined as for a given portfolio, time horizon, and probability p, the p VaR is defined as a threshold
Continue reading Option Pricing Theory The most used models are the Black-Scholes model and the binomial model. Both theories on options pricing have margins for error because their values are derived from other assets, usually the price of a company’s common/share stock. Binomial option pricing model The binomial option pricing model assumes a perfectly efficient market. Under this assumption, it is able
Continue reading The break-even point (BEP) The break-even point (BEP) is the point at which total cost and total revenue are equal. There is no net loss or gain. In short, all costs that must be paid are paid, and there is neither profit nor loss
Continue reading