A negative sum of discounted FCFF is rare. Usually, forecasts are positive and on top of that, there’s the terminal value. A negative forecasted cash flow in some years of your projection window shouldn’t stop you from using the DCF…

Equity beta is the overall business risk of the company, including both operational and financial risk. Asset beta on the other hand, excludes the effects of leverage on the capital structure, thus assuming the business is funded by equity only.…

You’re calculating the unlevered beta of a company and need the debt beta, but don’t know how to find it? Then this is for you. You can extract the implied debt beta from the CAPM formula by equating the formula…

Asset-intensive industries are industries that require big investments in fixed assets such as property, plant, and equipment (PP&E) to produce the goods or services they sell. Companies will have a high assets-to-sales ratio. Depreciation has a big impact on the…

The present value index tells you how promising an investment project is. You calculate it by dividing the present value of a project’s future expected cash flows by its initial investment cost. The higher the result the better. Financial analysts…

The difference is MOIC takes into account the value of both realized and unrealized gains and compares it to the invested capital. Thus, it is a gross measure of return that doesn’t take into account fund fees. Meanwhile, DPI compares…

RVPI in private equity compares the estimated remaining fair value of the fund’s investments that have not yet been exited, to all the capital the fund has received from investors. It gives you perspective on the performance of the fund’s…

Both TVPI and DPI are widely used in private equity to evaluate fund performance. TVPI compares the total value of a private equity fund (realized and unrealized gains and losses) to the capital the fund has received from its investors.…

The key difference between MOIC and ROIC is in the purpose of each metric. MOIC is mostly used in private equity to assess fund performance. In contrast, analysts use ROIC to evaluate how well a company allocates money from its…

To calculate the WACC you need the cost of equity, cost of debt, the proportions of equity and debt in the total value of the company, and the corporate tax rate. But what if you’re given the debt-to-equity ratio only,…

Working capital items such as accounts receivable, inventory, and accounts payable don’t go directly to the cash flow statement. However, the variation in the value of these items from the previous year to the current one is indeed included in…

Both paid-in capital and invested capital are used in private equity. Paid-in capital is the cumulative amount of committed capital that has been drawn down. In other words, the money that limited partners have actually transferred to the fund. On…

The cost of equity is the return equity investors demand in order to be willing to risk their money in the company. The Return on Equity is the profitability of that money. When the cost of equity is lower than…

It depends. If you want to evaluate the company’s ability to meet short-term obligations, you calculate working capital as the difference between total current assets and current liabilities. Current assets include cash and cash equivalents. If you want to compute…

Excess cash is cash balance beyond what a business requires to fulfill its daily operational money needs. Usually, analysts consider 2% of the revenues of a company as the cash it really needs to function properly. Thus, the remaining cash…

If you, as a shareholder, choose to do nothing or not subscribe to a rights issue, the company sells them in the market, and you receive the net proceeds. Your existing shareholdings will be worth less money (at least in…

Working cash is the cash balance a company has on hand to cover its day-to-day expenses and cash needs. In contrast, excess cash and marketable securities are non-operating assets the company does not employ in its business (having or not…

Yes. Private companies pay dividends either from net income, retained earnings, or newly issued debt, just like public companies do. The only significant difference is more regulation in public companies. That’s the gist of it. For a more comprehensive look…

Both TVPI and MOIC measure fund performance using the total value (realized plus unrealized) of private equity investments. The difference is in the denominator. MOIC divides the total value of the investment or fund by the total invested capital, whereas…

When a company goes public, its existing shareholders will see their shares lose controlling power in the company. However, this equity dilution only happens when the company issues new shares to raise capital. If the shares sold to the public…

If a SPAC fails to merge with a target company within the specified time frame (typically 2 years), it is liquidated and the funds raised in its IPO are returned. This means investors get their money back—minus any fees or…

Real options increase the expected returns of an investment opportunity by allowing adjustments to the investment strategy in response to changing market conditions or new information. In other words, having more flexibility in investment and disinvestment increases the value of…

Depreciation should not exceed capital expenditures in the terminal year of a DCF model unless you want to assume the value of the company’s assets will go to zero. When estimating the Enterprise Value of a firm through a DCF…

If maintenance/repair costs are capitalized into a fixed asset, inflation results in an increase in depreciation. Still confused? Keep reading for a more comprehensive answer: Depreciation is the non-cash expense that accounts for the decline in value of an asset…