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Debt Increase vs. WACC
What happens to WACC when debt increases?
Learn how different proportions of equity and debt in the total capital structure change the WACC.
How to Calculate Free Cash Flow from Earnings
How do you determine the impact of a new project on a company’s available cash?
This 3-step guide will show you how to get to the Free Cash Flow starting from Earnings (net income).
Early Indicators of Financial Distress
Financing operations through debt has its advantages, until a certain point.
Financial distress means a company is heading toward bankruptcy due to excessive leverage. Learn the 4 main signs of too much debt.
Indirect Costs of Financial Distress
Highly levered firms can incur in a potential loss due to financial distress of 10% to 20% of the firm’s value.
And most of these costs will be indirect. This guide will help you understand the 6 main indirect financial distress costs.
Negative Working Capital
Working capital is the cash left over after a company meets its short-term obligations.
This means a negative number is bad, right? Wrong. Find out why net negative working capital can be a good thing.
EBITDA vs. Revenue
What’s the difference between EBITDA and revenue?
Learn what is revenue, what is EBITDA, how to calculate the two, and what’s the goal behind both measures. Also, do you know when to use an EBITDA multiple and not a revenue multiple?
Increase in Working Capital vs. Cash Flow
Why is an increase in working capital considered a cash outflow?
When calculating a firm’s free cash flow to then discount it and get to a valuation, we need to deduct increases in working capital. Why?
APV vs. WACC
What’s the difference between the APV and the WACC?
Learn the differences and similarities between the Adjusted Present Value and the Weighted Average Cost of Capital in 4 simple steps.
How to Calculate MOIC
What’s the formula for the Multiple on Invested Capital (MOIC)?
Learn how the Multiple on Invested Capital is used in Private Equity to track fund performance.
Introduction to Asset Pricing
How do we value a risky cash flow?
This is a short post overviewing the challenge of asset pricing, and the different approaches there are to tackle it.
Expected Utility Theory
What makes an investor buy one asset over another?
Smooth consumption. Dominance. Choice theory under certainty. Choice theory under uncertainty. Expected utility theorem.
Constant Relative Risk Aversion
What is a CRRA utility function?
This is a guide containing 6 things you need in order to understand Constant Relative Risk Aversion.
Constant Absolute Risk Aversion
What is a CARA utility function?
This is an alternative to the CRRA utility function. Expand your knowledge of risk aversion coefficients, and learn why CARA is unrealistic.
Optimal Risky Portfolio
How can you get the most bang of return for your buck of risk?
Learn 5 things you need to know in order to understand optimal risky portfolios (also called tangency portfolio).
Forward Rate Agreement (FRA)
What is a Forward Rate Agreement (FRA)?
Find out the meaning of an FRA, how the contract works, and what are the advantages of using this derivative. Also, here’s a forward price calculator.
How to Calculate the VIX
How does the CBOE calculate the VIX?
This post will take you through 8 steps to understand how the fear index is calculated.
Ultimate Beginner’s Guide to Options
Over 40 million option contracts are traded every single day. But, what is an Option?
Calls, puts, ITM, OTM, intrinsic value, writing, payoffs, premium. What is all this jargon? Understand how options work.
Upper Bound of the Price of Puts
What’s the maximum price a put can reach? Why is this question important?
Learn how arbitrage opportunities explain the upper limits of European and American put options.
Protective Puts vs. Covered Calls
What’s the difference between a protective put and a covered call?
This is a complete guide on the key differences (and similarities) between the two option strategies.
One-Step Binomial Model
The one-step binomial model is the basis on which more complex models are built upon.
Want to master the basics? Start by understanding the logic behind binomial option pricing models.
Put-Call Parity with Dividends
What happens to put-call parity when a dividend gets in the mix?
Learn how to adjust put-call parity to accommodate for the payment of a dividend, whether it is discrete or continuous.
Hypothesis Testing in 5 Steps
Hypothesis Testing is the main tool of Statistical Inference.
Understand how to formulate and decide on a Hypothesis Testing.
Correlation & Regression Analysis
How do you measure the statistical relationship between two or more variables?
Get a complete overview of Correlation and Regression analysis.
What is the strict exogeneity assumption in OLS?
This a guide on 4 essential things you must understand about handling coefficient unbiasedness.