Relative 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% (View Full Article)

Operating Cash Flow - Free Cash Flow
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.

Return on Capital Employed - Finance Glossary
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.

Absorption Costing (Full Costing)
- 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

Time Value of Money
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.

Short Term Accounting Liquidity Ratios
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:

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

Bonds Valuation and Interest Rates - Premium or Discount Bonds
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

Valuing Stocks - Shareholder's Return Requirement, Growth Rate & Dividend Discount Model
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.

Indifference EBIT - Capital Structure of Corporations
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.

Modigliani & Miller (M&M Propositions I & II) - Capital Structure of Corporations
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.

Weighted Average Cost of Capital (WACC) - Capital Structure of Corporations
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!

Types of Bonds - Fixed Rate Bonds, Floating Rate Bonds, Asset-Backed Bonds, Perpetual Bonds, Bearer Bonds
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)

Dividend Yield - High & Low Dividend Yields - Tool for Investors
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%

Weighted Average Cost of Capital (WACC) Question with Dividend Growth Model
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)

Compounding Interest Monthly, Quarterly, Semi-Annually or Monthly
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)

Basic Terminology of Financial Leverage & Indifference EBIT
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:

(View Full Tutorial)