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
Mindset can give you skill set – skill set does not give you mindset. There are two types of people. 1. Skilled people 2. Driven people Yes, they’re not mutually exclusive. But, it’s easy to get highly skilled and lose the mindset. It’s easier to be driven and open-minded to then go and build skills. If I do not have
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
How does the market typically value companies? A) Based on near-term earnings B) Based on long-term earnings C) Based on near-term cash flows D) Based on long-term cash flows Check Answer
Your management is not working in your favor. Say you’re the CFO. First, congratulations. You made it! Investment Banking. Business school. Private Equity. All paid off. Call your parents, they will be proud. Next, what do you care about? Your new pay package. Those sweet bonuses are hard to take your eyes off. Millions of dollars – it’s a big
Would you lend more than you are paid back? Probably not. But investors do this often. If a bond returns $1,000 to their bond investors, why would investors purchase the bond for more than $1,000. Doesn’t that mean that the investor is guaranteed to lose money. Not exactly. So, why exactly do a company’s bonds trade above the face value?
Being naive might be our superpower (as young people). Whenever we want to start anything, we probably want to do that thing well. Being experienced means that we need to find all the answers to start our business. But, being naive means that we overlook the struggles and pains. We get started. The starting helps us to answer those questions.
Would you ever lend me money for free? And charge no interest. Probably not. Well, maybe, if you are my friend. But, it’s unlikely that you would lend money for nothing in return. Why? Well there is risk that stems from the uncertainty on whether you will get your money back. For that risk, you ask me to compensate you.
Don’t skip to skip. Skip to win. Yesterday, one of my buddies told me to show up to class while another one of my buddies joked about having to show up to class. Winning is all about showing up, right? Not exactly. You’re missing the point. Skipping things may seem bad. Oh, you skipped the meeting. You skipped class. You
