Flexibility leads to value. Imagine that you have an assignment due at 11:59pm. That assignment is worth 50% of your grade. It is currently 11:00pm and you haven’t started. You are panicking. Say I am the professor of that class. How much would you pay me to give you the option to submit the homework 1 day late? Well, you
Why do asset-light, IP business trade so high? In recent years, the separation of asset-heavy from IP business units has increased. This phenomenon is known as Nikefication. Nikefication was pioneered by, hint, Nike. This operational strategy separates design from production and distribution. Corporations adopt a decentralized approach by outsourcing various functions like production and distribution to contractors. By separating the
How can a company operate with an accumulated deficit? First, when does this happen? The simple answer – the company keeps losing money. Why? Probably because the company is not economically viable. Something about the business model makes it unprofitable. The lack of profitability accumulates. Specifically, on the company’s balance sheet. Under retained earnings. Retained earnings represent the accumulation of
Can the value of shareholder equity be negative? Not really. But, it depends. It depends on how we define shareholder equity. First, equity refers to residual ownership in a company. Similar to your net worth. It’s the assets net the liabilities. It’s what you own less what you owe. The value that is left over is by definition that value
Are there antitrust concerns that arise from index fund managers? There are the big three. Vanguard State Street BlackRock They are by far the largest passive investors. Look, they own almost 5-15% in every public company through the indices they provide investors. It’s simple. They create indices. These indices are passive funds, meaning that they are not actively involved in
If capitalism is great… Why does the government have a vested interest in limiting it? Specifically, when it comes to monopolistic behaviors amongst firms. What defines this behavior? Any attempt to establish or maintain monopoly power within a certain market. Monopoly power exists when a single company controls a significant portion of the market, allowing it to … (i) Set
Can you calculate IRR on paper? No. Well, that is unless you are a mathematical wizard with 200+ IQ. Well, even then, it’s really not possible. While the steps can be understood, the mathematical computations are nearly impossible to do on paper. Maybe you could take the 9th root of a cash flow in year 9. OK, very impressive, but
Compounding is to multiplication as discounting is to division. It’s just going one way or the other. Compounding is going from value of money today (present value) to value of money some years from now (future value). Discounting is going from value of money today (present value) to value of money some years from now (future value). Take the following
What’s the difference between arithmetic and geometric returns? Arithmetic returns are straightforward to calculate. Add up the returns for each period and divide by the number of periods. They are commonly used for simple return calculations. In case 1 and case 2, we can see the arithmetic mean under constant 10% returns and 25% over the last 2 years, both
Why is my IRR calculation outputting a different number than expected? In simple terms, IRR is the average return over a period of time on an investment. Say the value of our investment increases by exactly 10% each year for 5 years. In this case, the average return is fairly straightforward. It averages to 10%. IRR = 10% The exit
