Corporate Finance Tutorials from FinanceScholar.com
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Investing in mutual funds
also includes the fact that you have to pay your broker a lot
of fees. Some mutual fund brokers will make it seem to you that
the higher fee you pay, the higher return you will achieve on
your investment. This is NOT true. All the broker will be doing
(if you pay a higher fee) is take greater risks with your money,
which could have devastating consequences. In order to avoid
paying high fees to your broker and to maximize your ROI (return
on investment), you should consider the different classes of
mutual funds to purchase and which class is the right one for
Corporations and their shareholders
are determined to make profits from their business operations
and make a good return on their investment (ROI). In order to
make good profits, a firm needs to be run efficiently and have
sufficient cash flow to meet current liabilities and short term
debt (liquidity). You as a small scale investor need to investigate
the profitability of a company in order to determine if it is
both liquid and it is being run efficiently. The way to do this
is by calculating the various profit margin ratios available.
We look at a few below:
One of the ways of determining
if a particular stock is strong is by looking at that company's
Balance Sheet. The balance sheet will illustrate what the company
owns (current & long term assets), what it owes (short &
long term debt) and its position of financial liquidity. You
wouldn't want to invest in a company that has trouble paying
its short term bills now would you? In this article, we will
look at 3 of the common accounting ratios that help determine
the financial position of a company.
There are 2 types of debt
that fall under the Home Mortgage Interest Tax deduction provision
and are tax-deductible. The first type of debt is debt that
was acquired in order to build, purchase or improve your home.
The second type of debt is called equity debt because the collateral
used is drawn on the equity of your home. You can therefore
take out a maximum debt of $1.1 million and deduct the mortgage
interest from your taxes payable. However, any of the mortgages
you acquire must fall into 1 of the following categories:
- Debt Acquired Before October
13, 1987: Referred to as "Grandfathered debt",
you can deduct all interest paid on any of this debt.
- Debt Acquired After October
13, 1987: If you took out this debt to build, purchase
or improve your home, you can fully deduct all interest paid
on this debt provided the total debt you acquired (including
the Grandfathered Debt) does not exceed $1 million for married
couples or $500,000 for singles.
- Home Equity Debt Acquired After
October 13, 1987: If you acquired debt after this
date for reasons OTHER than to build, improve or purchase
your home, the maximum can be $100,000 for married couples
or $50,000 for singles.
Cyclical and non cyclical
is the correlation of stocks with the economic conditions of
the market and general fluctuations of the economy. Cyclical
stocks are highly correlated with the market conditions. For
example, if the economy is weak and consumers are not spending
money, Cyclical stocks will experience a decline in prices.
This is because with less disposable income, consumers can afford
less luxuries and material goods. This results in lower sales
and net income results for Cyclical stock companies.
The first modern mutual fund
was created in 1924 in Boston, Massachussets. Known as Massachusetts
Investors' Trust, the fund went public in 1928 and eventually
led to the founding of MFS Investment Management firm. Some
of the innovators involved in this transformation included Richard
Paine, Richard Saltonstall and Paul Cabot.
By the year 1929, there were 700 closed-end
funds with 19 open-ended mutual funds. Thanks to the 1929 stock
market crash, closed-end funds lost their popularity and small
open-end funds started to skyrocket. In 1933, the Securities
and Exchange Commission (SEC) was created to protect the investments
of consumers in mutual funds. Mutual funds must be registered
with the Securities and Exchange Commission (SEC) before they
can be invested into.
Value of Growth
Relative Value of
Growth (RVG) is a Finance formula
invented by Nathaniel J. Mass that determines how corporate
growth and profit margin improvement can affect the value of
shareholder's investment in a company. The Relative Value of
Growth formula divides 1% growth of the company's revenues by
1% improvement in its profit margin. The division between the
two shows whether the growth of the corporation was valuable
or not. For example, an RVG of 2 indicates
that the corporation would generate 2 times as much Shareholder
Value by adding 1% of growth, as opposed to increasing the operating
profit margin by 1% font color="#0000FF"><(View
An Option is a contractual
right given to an individual allowing him to buy or sell an
underlying asset (common stock, derivatives, etc) at a specific
price on or before a certain date. Options are similar to stocks
and bonds in that they are all securities that have strict defined
terms and characteristics.
Take a real life example. Imagine you want
to purchase this piece of jewellery for $50,000 but you do not
have the cash upfront. However, 6 months later, you will have
enough cash to afford the jewellery. So you make a deal with
the owner, giving you the option of purchasing this piece of
jewellery for $50,000 in exactly 6 months from now. However,
to give you the right or this "Option", the owner
charges you $2500. From here, you stand to either gain from
the transaction or lose from it.
Stock Beta is a calculation
or measurement of volatility or risk of a stock trading on the
stock market. It is the fluctuation in stock prices and the
market in general. Some stocks have greater risk than others,
and thus carry higher Stock Betas. Stock betas are measured
using regression analysis.
Cash Flow from Operations (Operating Cash Flow) compares
the difference between reported Operating or Net Income and
actual cash flows of the company. If a company does not have
sufficient cash resources set aside to pay off its Current
Liabilities, then this shows a sign of inefficiency or problems
with inventory turnover (goods not getting sold). A healthy
company is one where inventory is turned over at industry standard
rate and one where there's enough cash in the bank to meet both
short term and long term debt obligations.
If you buy a stock at a P/E ratio
of 15, this means it will take you 15 years of earnings derived
from that stock in order to cover up your original investment.
In other words, you'll get a "payback in 15 years."
Consider a corp that earned $15 million last year and had earnings
per share of $15 with 1.5 million shares outstanding. If the
current trading price of the stock is $150, this means the firm's
P/E Ratio is = $150 / $15 = $10. This can also mean the investors
are willing to pay $10 for every $1 of earnings derived from
Return on Capital Employed (ROCE)
is a measuring tool that measures the efficiency and profitability
of capital investments undertaken by a corporation. A firm acquires
capital assets such as trucks, computers, etc to help makes
its business operations more efficient, cut down on costs and
realize greater profits or acquire more market share. Return
on Capital Employed ratio also indicates whether the company
is earning sufficient revenues and profits in order to make
the best use of its capital assets. It is expressed in the form
of a percentage, and the higher the percentage, the better.
- Direct Materials
- These are the raw materials such as wood, metal, bricks, etc
that are used in order to create a finished usable good which
will be demanded by the market.
- Direct Labor - Direct Labor is the manwork
and total factory hours put behind assembling the raw materials,
creating the finished good, etc.
- Fixed Manufacturing Overhead - This includes
expenses such as rent of factory where the raw materials are
turned into finished goods, amortization of factory building,
In essence, time value of money refers to the growth
of 1 dollar as time increases. 1 dollar today is worth more
10 years down the road because it can earn interest payments.
How much is 1$ worth 10 years down the road? This answer depends
on various factors such as the interest rate, monthly/quarterly/annual
compounding, payment contributions or withdrawals and more.
Working capital is a measure of a firm's ability to
pay off short term debt and have enough money to finance its
day to day business operations. The formula for Working Capital
Capital = Current Assets - Current Liabilities
Therefore, if Current Assets are greater
than Current Liabilities, than the firm is financially healthy
in the short term. However, if Current Liabilities are greater
than Current Assets, the company may have to borrow additional
debt (bond financing)
to finance its day to day business operations, and if conditions
do not change, it may be heading towards bankruptcy