If the terminal year cash flow is discounted by 4.5 years, why would we discount the terminal value by 5 years? There are 2 ways to determine the terminal value of a company. In the first case, we are implicitly projecting the growing cash flow stream indefinitely. Then, finding the present value. In this case, it makes sense to keep
If Apple had a massive investment in WeWork debt, what would happen? Given that WeWork just exited chapter 11. The underlying question– How do unrealized gains or losses affect the financial statements? Well, I would hope that Apple was more sophisticated than me. And did not get carried away in the WeWork hype. So, say, the WeWork debt is still
Republic First (not First Republic) collapsed last Friday. Does this mean that banks are investing too aggressively in speculative assets? Not exactly. The bank under normal circumstances would not collapse. The reason that the peer banks collapsed was because of multiple dominos falling. First, we need to understand the business model of banks. Borrow short, lend long. What do I
What causes companies to pay less in effective taxes than the statutory tax rate? If the US tax rate is 21%, why do some companies report paying less than that? Considerably so. Well, the difference arises from permanent book-tax differences. That is transactions that permanently result in the book taxes differing from how much is paid in cash taxes. Firms
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 amortization expense on the income
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 their backs when they were
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 span associated with them. Patents
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 5-year maturity, this means that
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 asset for $100. Over the
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. So that on the 10th
