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The History of Goodwill
The way that accountants have recorded goodwill across the statements has varied. In 1970, the APB required firms to amortize goodwill for no longer than 40 years. Goodwill at that time was seen as a “wasting asset.” That is one with a definite life that loses value over time. This means that goodwill increased the…
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It’s Hard Understanding Ourselves
One of the hardest yet most powerful things we can do is understand ourselves. I find it pretty challenging to know what it is that I really want. Me. And me alone. And, the reality is that everyone is just figuring it out. Our interests are changing. Our experiences are growing. Our worldview is expanding.…
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How Do Firms Quantify Goodwill?
First, what really is goodwill? If I say that I have built up lots of goodwill with my friends, that suggests that I have built a decent reputation with them. Maybe this could be in the form of favors. I may have done a lot of favors for free. This builds goodwill.I may have covered…
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How Do Companies Reflect Changes in Goodwill?
How do companies assess the value of goodwill on the balance sheet? Companies do not amortize goodwill as an expense. Why? Because goodwill in a sense is indefinite. Meaning that it does not have a specified life. When we think about other intangible assets such as patents or customers, there is an average expected life…
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To Be Well-rounded or Unidimensional?
To be well-rounded or unidimensional? This is a question I am trying to answer. Over the past few years, I have heard conflicting opinions. Be well-rounded. Go to a good college. Get a good white-collar job. Have a nice family. Be faithful. Be fit. Be funny. Etc. Be really good at one thing. Prioritize your…
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Question of the Day 4/27
Question In January, DropoutEdu sold and delivered $100 worth of textbooks to customers. But, the customers only need to pay cash for the purchase in February. Assuming a 25% tax rate, how much would DropoutEdu report in earnings in January? Answer Answer: 75 Cash is irrelevant to income statement earnings. First, the goods were transferred…
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Minute Markets 4/26/24
Key Events 👉 Google beats earnings, announces first-ever dividend Google’s shares soared 11.4% post-market on Thursday after beating earnings expectations in sales, profit, and advertising revenue. The strong performance was driven by accelerated growth across three major sectors: AI-enabled search, Youtube advertising, and cloud computing. Google also introduced a quarterly dividend of 20 cents a…
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My Problem Isn’t About Getting Started.
The simple answer is just start. The better answer is reduce friction. There are a lot of things we want to start. Going to the gym routinely.Reading daily.Building a business.Etc. The common advice I got was just get started. Action at the start is more meaningful than information. We have all the information we need…
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Minute Markets 4/24/24
Key Events 👉 The FTC bans noncompetes The Federal Trade Commission (FTC), which is responsible for fostering fair competition, bans the use of non-compete employee contracts in the US, arguing that that theyRestrict the freedom of workersSuppress wagesSlow down new business formation. Non-compete clauses are contractual clauses that prohibit employees from engaging in certain competitive…
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Callable Bonds
What are callable bonds? A bond is a fixed-income instrument. It is a stream of cash flows that the issuer agrees to pay to the lender within a specified time. It is a fixed contract. If DropoutEdu issues a bond with a face value of $1,000, a coupon rate of 5% paid annually, and a…
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Risks of Too Much Leverage
What are the risks of taking on more leverage? Well leverage can work for or against you. It all depends on the direction of your absolute returns. If you generate a positive return, leverage further increases your returns. If you generate a negative return, leverage further decreases your returns. For instance, say you bought an…
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Deadlines Get Stuff Done
Things get done when I am involved. Why? Is it because I have some crazy work ethic or pace? Maybe. Is it because I am intense? Maybe. But, really it’s because of when, not whether, I get involved. That is, I usually get involved in things near the deadline. I especially struggle with starting things…
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Working Capital is Like Negative Splits
Negative splitting in running terms means that your last lap was faster than your previous. Good runners start slower and get faster as the race progresses. I am notoriously bad at this. Starting fast then slowing down. So, what do I do? Well, on my 9th 400, I slowed down my pace to 90 seconds.…
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Why Use So Much Debt?
Why do private equity firms want to invest the least amount of money into a deal? Don’t private equity firms have a lot of money to invest? Yes. Isn’t it because they want to diversify their holdings? Maybe. But, the real reason is math. By that, I mean that mathematically you generate the highest relative…
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The Value Lies in the Uncertainty
Entrepreneurship is the uncertainty of doing work that may never pay off. The feeling that you wasted years chasing something that fails. This is by far one of the hardest things about entrepreneurship. The uncertainty. I find it easy for my friends from the outside in to tell me that life must be great. Making…
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Question of the Day 4/23
Question In January, DropoutEdu sold and delivered $100 worth of textbooks to customers. Assuming a 25% tax rate, how much would DropoutEdu report in earnings in January? Answer Answer: 75 Explanation: First, the goods were transferred in January, it aligns with the reporting period (January) on the statement. Second, revenue affects earnings to common shareholders.…
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Minute Markets 4/22/24
Last 3 weeks we saw a bifurcation in this market. Tech, not too hot. Non-tech doing great. Tech bounced today. Key Events 👉 TikTok preps for legal battle against US The House passes divest-or-ban bill 360 to 58. This could be the first full blown social media ban by the US government. The Senate will…
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Types of Equity Capital in LBOs
Equity can come from two primary sources in LBO financing. The amount of sponsor equity that is usually invested is the difference between the total uses and the maximum amount of debt capital the firm was able to access. Total Uses – Debt = Equity The private equity firms invested capital is called sponsor equity.…
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How Sponsors Think About Leverage
The goal for private equity firms is often to take on the greatest amount of leverage that the company can handle. By handle, this means that the company should have enough cash flows to service any interest and principal repayments and then some in case things don’t go as planned. Sponsors think about the maximal…
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Life’s all Relative
When we think about life. Life is all relative. There are very few things in this world where the absolutes matter. I am a better investor – because I beat the markets by 1%.I am a better cook – because my family likes my food more than eating out.I am fitter – because I can…
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Financing Fees in LBOs
How should we treat financing fees in an LBO? Financing fees are any upfront costs associated with issuing new money. Typically, whenever companies issue new debt, they must pay the lender a commitment fee of 0.25% to 2%. Even the financial sponsor may charge fees on total sources less fees in contributing capital to close…
