Cross Rates w/ Compounding Growth

In managerial accounting, we learn that sales is a function of price and volume, and that the growth of both sales and volume are not additive, but rather multiplicative (i.e., geometric).  The product of their growth rates is known as a cross rate, and can be derived by the following formula:

Sales = Price × Volume, and

Sales Growth =[ ( 1 + Price Growth Rate) × (1 + Volume Growth Rate) -1]

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Further Insights Into The Gorden Dividend Discount Model (DDM)

In a previous post, Gordon Dividend Discount Model (DDM) versus FCF Valuation Model, I explored the relationship between dividends being paid versus net income being retained, and how these both balance out within the DDM so that if more dividends are paid, less growth occurs, and if more net income is retained (i.e., less dividends are paid), more growth occurs.

A discussion of such is necessary because with the DDM equation below, the question quickly arises regarding the dividend being paid out versus the net income being retained:

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A Closer Look at LINEST and Multiple Linear Regression

In a previous blog post, I walked through how Microsoft Excel calculates all of the variables for its LINEST function (i.e., multiple linear regression) except for the variable coefficients and their standard error, but promised to revisit LINEST.  This blog post directly addresses how to calculate manually the variable coefficients as well as their standard error.

The attached spreadsheet utilizes numerous advanced Microsoft Excel functions (i.e., LINEST, TRANSPOSE, MMULT, and MINVERSE, ) so you may need to  review these in parallel on your own to completely understand what is being done in this spreadsheet.

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The Proper Use of Beta (β)

In my previous post I highlighted the flaws associated with Beta (β), in this post I would like to explore the proper use of Beta.

Studies have shown that managed portfolios only outperform the S&P500 Index about 1/3rd of the time in both bear and bull markets – this means that for 2/3rds of the time it is better to just invest your money in an index fund, and forget about it.  So how do we get in this upper 1/3rd that beats the market index?  One potential way is the proper use of Beta.

If Beta, when applied to the CAPM, gives us the required return assuming a well diversified portfolio (based on historic data), then we must earn above this required return in order to justify investing in an individual stock versus the market index.  This means that we must determine what our expected (anticipated) return is for the stock in question.

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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 dollar of investment is simply $V = $I*(R% – F%), and the return (RI%) on the dollar of investment is RI% = R% – F%.

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