 Relative
Value of Growth
Tutorial
Added on: December
6th , 2006
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% (View
Full Article)
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Tutorial
Added on: November
9th , 2006
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.
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Tutorial
Added on: November
5th , 2006
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.
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Tutorial
Added on: November
5th , 2006
- 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, utilities, etc
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 Tutorial
Added on: October
5th , 2006
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.
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 Tutorial
Added on: October
5th , 2006
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 is:
| Working
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
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 Tutorial
Added on: October
5th , 2006
Imagine you borrow $10,000 now at a rate
of 12% interest annually, for the next 30 years.
You will therefore pay 0.12 x $10,000 = $1200 per
year for the next 30 years. At the end of the 30
years, you will also pay back the original $10,000
(principal amount). What is the total amount you
have paid?
$1200 per year x 30 years = $36000 (interest payments)
$10,000 (original principal)
Total payments = $36,000 + $10,000 = $46,000
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 Tutorial
Added on: October
5th , 2006
This section is similar to the section
on valuating bonds. If you recall, a corporation
can finance its operations in 2 ways:
1) Issue bonds (debt financing)
2) Issue common or preferred stock shares
We will go on to value these common and preferred
stock shares using various dividend growth formulas.
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 Tutorial
Added on: October
5th , 2006
Indifference Earnings Before Interest &
Taxes (Indifference EBIT) is the point of the capital
structure where the corporation does not care about
whether they issue new debt, have no debt and 100%
equity or have a combination of both debt &
equity. From the graph below, you can determine
that the Indifference EBIT point is where the With
Debt Capital Structure Line intersects with the
No Debt Capital Structure Line.
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 Tutorial
Added on: October
5th , 2006
M&M Proposition I states that the value
of a firm does NOT depend on its capital structure.
For example, think of 2 firms that have the same
business operations, and same kind of assets. Thus,
the left side of their Balance Sheets look exactly
the same. The only thing different between the 2
firms is the right side of the balance sheet, i.e
the liabilities and how they finance their business
activities.
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Tutorial
Added on: October
5th , 2006
Weighted Average Cost of Capital (WACC)
is therefore an overall return that a corporation
MUST earn on its existing assets and business operations
in order to increase or maintain the value of the
current stock. For example, if Microsoft's WACC
is 15% and current stock price is 28$, then the
company must earn a 15% return on its existing assets
and business operations (net income) in order to
MAINTAIN the stock price at $28. The last thing
that corporations would wish to happen is their
stock price falling down!
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 Tutorial
Added on: October
5th , 2006
Fixed rate bonds are what the name implies,
they provide a fixed coupon interest payment at
each period (monthly, quarterly, semi-annually or
annually) for a certain # of years up until maturity.
Upon maturity, fixed rate bonds pay back the entire
original principal amount. Go here to learn more
about bond debt securities. (View
Full Tutorial)
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 Tutorial
Added on: October
5th , 2006
Imagine the current stock price of a XYZ
Corp. is $42.45 Also, the annual dividend payment
per share that it pays out is $1.25. Using this
information, what is the dividend yield?
Dividend Yield = Dividend per Share / Current Share
Price
Dividend Yield = $1.25 / 42.45
Dividend Yield = 0.0295 = 2.95%
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Tutorial
Added on: October
5th , 2006
Zee Zee Inc. issued bonds with a face value
of $50,000,000. The bonds are currently yielding
4% return with a coupon rate of 5% interest paid
quarterly. The # of years till maturity is 10 years.
The corporation just paid a dividend of $3 per share.
The dividends are expected to grow at 6% per year
indefinitely with the current stock price being
at $18 per share. There are 1,500,000 common shares
outstanding at this time. Assuming a tax rate of
40%, calculate Zee Zee Inc.'s Weighted Average Cost
of Capital (WACC). (View
Full Tutorial)
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Tutorial
Added on: October
5th , 2006
In our tutorial on long term time value
of money, we explained compound interest in the
form of annually compounded interest. What happens
if the interest is not compounded annually (once
a year), but quarterly (4 times a year) or monthly
(12 times a year)? In these circumstances, our money
would grow much faster at monthly compounding, as
opposed to annual compounding. Let's take a look:(View
Full Tutorial)
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Tutorial
Added on: October
5th , 2006
Degree of Financial Leverage measures the
amount of risk a company takes up when it borrows
more debt (and increases the debt portion of its
capital structure). The formula for Degree of Financial
Leverage is:
| Degree
of Financial Leverage = |
Earnings
Before Interest & Taxes (EBIT)
Earnings Before Taxes (EBT) |
(View
Full Tutorial)
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