What is an Incremental Investment Dollar Worth?

Jan 15

What is an Incremental Investment Dollar Worth?

Whether you are an employee, a business owner, or a shareholder, you may have wondered what an incremental dollar of investment is worth to your company. First it depends upon the cost of funding (F%) for an incremental dollar of investment ($I), and second the return (R%) that you earn on that incremental dollar of investment.  The dollar value ($V) created by the...

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Assessing Enterprise Risk Via Free Cash Flows

Aug 08

Assessing Enterprise Risk Via Free Cash Flows

When looking at a company, from the smallest sole proprietorship to the largest multinational corporation, how does one assess risk?  Risk is simply the uncertainty (fluctuations) of the free cash flows being generated by the company.  This means that a company is only as good as its assets that are in place (including human assets), since these assets are what...

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Gordon Dividend Discount Model (DDM) versus FCF Valuation Model

Jul 01

Two popular models for valuing equity are the DDM and FCFS models.  The DDM is sometimes referred to the Gordon constant growth model, because it assumes the firm is growing at constant growth rate.  Both of these models are perpetuities of cash flows that have been paid to the shareholder (i.e., D0) or cash flows that are available to be paid to the shareholder...

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How to use the CAPM and Beta

Apr 23

How to use the CAPM and Beta

In a world where non-linearity and randomness are the norm, the capital asset pricing model (CAPM) is widely accepted despite it being a linear model, and this is probably due to the simplicity of the model and its pre-computer age birth (see equation below).  A well recognized and utilized metric in finance is beta (β), which is the slope in the linear CAPM.  To...

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