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Hidden Costs of Debt
Is interest the only cost of issuing debt? No. Interest is important as both the lender and borrower. But, lenders have other ways to increase their returns. Aka other fees. One such fee is the commitment fee. This fee ranges from 0.25% to 2% of the loan amount. So, if you were to take on…
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You Think You Made It. When You Realize You Didn’t.
You think you made it, and that’s when you realize you haven’t. This defines much of my life. And, maybe even yours. If you are a competitive person. I am always seeking new opportunities. When I was in grade school, I wanted to get the best SAT score. When I got the SAT score, I…
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Question of the Day 4/20
Question When does an item show up on the income statement? A) The revenue or expense recognized or incurred in the period listed on the statement. B) When the cash is transferred from one party to another. C) Earnings to equity investors are affected. D) When cash is expected to be transferred from one party…
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Why do Distressed Companies Take on New Debt?
Distressed companies are distressed because they are unable to meet their covenants, or rules placed by lenders, on their debt obligations. For some companies, this can be because they overlevered and do not have the ability to have their operations cover their interest on debt. If this is the case, the company must restructure itself.…
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Purchase and Trading Multiples
Purchase Multiples versus trading multiples. What’s the difference? Trading multiples represent the firm’s current market value relative to a metric. The market value could be either that of the firm (market enterprise value) or that of equity (market value of equity). The metric could be anything that is correlated to the firm’s ability to generate…
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Winning is Not About You. It’s About Them.
Winning a conversation is not about getting what you want – it’s about making the other person feel heard. Yesterday, a friend told me about his interaction with his coach. After a weekend competition, driving back to Ann Arbor the team wanted to get dinner. They had competed hard the past 3 days and were…
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Sources and Uses. What’s the Buzz?
Why do we need a Sources & Uses schedule? In an LBO, the schedule is the basis of the new capital structure of the pro-forma company (post-LBO). The capitalization of the business will change depending on how much leverage the private equity firm decides to put on the company to close the deal. The S&U…
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Sources and Uses
What are the sources? What are the uses? At its core, a deal is a financial transaction between two parties. If you are acquiring a company, you are exchanging capital for the business. In doing so, you need to first establish what is the amount of capital that must be transferred to the seller in…
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The Endless Pursuit
We are all searching for something. And, we know it’s not there. We convince ourselves that we must look a little longer. But, we know that time is limited. We convince ourselves that we must dig a little deeper. But, we know that there is only so much we need to know. Most of the…
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Treasury Stock Method
Options are not the same as shares. Many of my students think that 1 option equals 1 share. This is true on the surface. A call option gives you the right to buy a share of stock at a specified price by a given date. So, if you work for DropoutEdu and were granted 1…
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Why Not Just Exercise the Option?
An option gives us the right to convert into shares. So, why don’t we always exercise that right? Say we owned Tesla options. Who doesn’t want shares of Tesla? Well, like everything in finance. It depends on the price. If the price is not right, it may not make sense to exercise the option. By…
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Minute Markets 4/17/24
Key Events 👉 Microsoft invests $1.5B minority stake in G42 Microsoft’s investment is seen as a move to strengthen US interests in the global AI sector, potentially countering China’s growing influence. G42 is an Emirati AI company that provides digital infrastructure and cloud computing services. Previously, the company used Chinese hardware to operate their systems.…
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The Attractive but Unimplementable
A few days ago, I was listening to a podcast with Howard Marks. Howard Marks is the billionaire co-founder and investor behind Oaktree Capital, which manages ~$189bn of assets primarily known for their complex credit investing strategies. Howard has been writing since the early 90s. Similar to Buffett (who has been writing since the 60s).…
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Shorter, Shorter, and Shorter Feedback Loops
We like quick feedback loops. But is this always better? Recently, I have been running into a common trend in business. Consumers value quick feedback. The most obvious example? TikTok. They have shortened each cycle to 10-20 seconds. Bored? Swipe up to the next video. Enjoying it? Watch it longer, engage with it, and then…
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Does Basic or Diluted Matter in M&A?
Do we care about basic or diluted shares in M&A? In M&A, the acquirer (buyer) is attempting to buyout the target (seller). In order for the buyer to purchase each outstanding share in the selling company. So, if the target has 100 shares, the buyer would need to buyout the entire 100 shares to acquire…
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Is Purchase Equity Value Not Equity Value?
What makes purchase equity value different from equity value? Equity value is also known as market capitalization. It is share prices x shares outstanding. Purchase equity value is different from that. It has to do with the value that is attributed to equity investors in a case where the company was being acquired. The acquirer…
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Why Does Share Price Slide on Deal Announcement?
Why would shares slide on the announcement of an M&A deal? Maybe, the deal is dilutive. What do we mean by dilutive? It means that whatever metric we use to benchmark the deal performance is falling after the transaction occurs. The metric we often use in M&A is EPS so see the short-term implications of…
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Question of the Day 4/16
Question Does the income statement show financial information for a period of time or a point in time? A) Period of timeB) Point in time Answer Correct Answer: A) Period Explanation: The income statement displays financial information for a specific period rather than a point in time. It summarizes a company’s revenues, expenses, and resulting…
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Minute Markets 4/16/24
Key Events 👉 Hawkish repricing of Fed pivot CPI inflation data has been ahead of consensus for the past 3 releases. CPI numbers come out on a monthly basis. Inflation is an important indicator the Fed is patiently watching. It is coming down slower than expected. So, the market is expecting the Fed to be…
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Alwyn’s Information Paradox
Information is abundant. It’s excessive. You agree? Good. But, we crave information. We are addicted to it. You agree? No? Check your screen time again pls. – – – Here’s a new paradox I have been running into. We all want more information. It is almost as if information is the cure to our problems.…
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4/13 Question of the Day
Question Which of the following statements best describes the difference between “point in time” and “period of time” in financial statements? A) “Point in time” refers to a specific moment, while “period of time” refers to a range of moments.B) “Point in time” refers to a range of moments, while “period of time” refers to…
