Put simply, net working capital is your current assets minus your current liabilities. So, what are current assets and what are current liabilities? Your current assets are anything that you would expect to be convertible into cash within one operating cycle. This means that they are cash, inventory, securities, prepaid expenses (like insurance or rent), accounts receivable, etc. Your …
Continue reading "What is net working capital?"A bond spread is the difference between the yields of two bonds with different credit ratings. The differing ratings are usually because of different levels of risk involved with the bonds. Mathematically, you can calculate the spread by subtracting the interest rate of one bond from the interest rate of the other. For example, if …
Continue reading "What is a bond spread?"I recently listened to a rather interesting episode of the NPR podcast, Planet Money. Through a Freedom of Information Act request, NPR received a report from 2000 entitled Life After Debt. At the time, it was estimated that with the current budgetary surpluses, the US federal government would have the national deficit paid off in the year …
Continue reading "How long have we had a national debt?"Today’s business term is “high ratio mortgage”. A high ratio mortgage is a mortgage of over 80% of the value of the property being mortgaged. Put in other words, it is when the borrower is putting down 20% or less, as a down payment. Often, the borrower is going to have difficulty getting such a loan …
Continue reading "What is a High Ratio Mortgage?"In our current economic conditions, it is important to understand interest rates. If you do not understand what the actual cost of borrowing of lending money is, you could be cheating yourself out of profits. Let’s start by defining nominal interest rates. The nominal interest rate is the market interest rate before an adjustment for …
Continue reading "What is the difference between a real interest rate and a nominal interest rate?"Today, we are going to be looking into the world of international finance. The London Interbank Offer Rate (LIBOR) is an interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market (source). The LIBOR is fixed on a daily basis by the British Bankers’ Association. The BBA polls …
Continue reading "What is the London Interbank Offer Rate (LIBOR)?"A business can have a number of different possible capital structures. A firm’s capital structure is defined as “mix of a company’s long-term debt, specific short-term debt, common equity and preferred equity.(source)” In the paper “The Cost of Capital, Corporation Finance and the Theory of Investment”, Franco Modigliani and Merton Miller stated that if you consider two …
Continue reading "What are Modigliani and Miller Proposition I and Proposition II?"We are a few weeks into the series of finance-related posts. I figured I would explain this series a little before we go into today’s topic. I am currently working on an Masters of Business Administration at Cardinal Stritch University, in Glendale, WI. As I go through my homework, I often find that the textbook …
Continue reading "What is the Weighted Average Cost of Capital?"According to investopedia, a normal distribution is “a probability distribution that plots all of its values in a symmetrical fashion and most of the results are situated around the probability’s mean”. If a firm’s returns are normally distributed, it means that if you create a histogram of a company’s returns, over a larger period of time, the histogram would …
Continue reading "What does it mean for a stock to be normally distributed?"Two weeks ago, we learned about a company’s beta. Last week, we used the company’s beta when we learned about the capital asset pricing model. This week, we are going to take things a little further. In today’s post, we are going to be talking about the cost of equity. Investopedia states that “a firm’s …
Continue reading "What is the cost of equity?"