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Yesterday, I worked with a student who is attending a very prestigious university. Some of the topics we covered were foundational concepts in finance such as stock valuation and calculating the required return for an investor using CAPM formula. However, the course utilizes variations of standard formulas to derive values. For example, the dividend discount model uses the dividends as the numerator and the required rate of return minus growth as the denominator. In this course, the numerator is changed to reflect the plow back ratio and earnings per share. By changing this formula slightly, the application of the formula changes from heavy use and capital budgeting to potential use in determining current stock prices. Very interesting approach to finance.
Yesterday, I hope the student use various financial calculations to solve for simple interest, future value, and present value. Usually, the future and present values are focused upon solving problems for time value of money. However, in adding the simple interest formula, the focus of the tutoring session was pretty much figuring out interest on various types of loans. The difference between compound loans and simple interest loans is the simple interest loans do not compound interest. From this, the calculations are simple, which are principal x interest x the length of time for the loan. To contrast, the present value and future value formula is much more complex. When doing the present and future value formulas, I much rather use Excel to solve the problems. This is because once the formulas are entered, just the variables need to change in the answers will automatically calculate. Hope this gives everybody a little bit better of insight as to the differences between simple interest and compound interest loans.
Today, I help the student understand the various concepts of index funds. An index fund is a passively managed fund which follows specific indexes in the marketplace. Index funds follow the Dow 30, S&P 500, and numerous other institutionalized indexes. The benefits for investing with index funds are numerous. Index funds have been shown to offer higher returns than actively managed funds. Also, these types of funds have lower cost involved due to less trading by managers. Finally, index funds are easily understood by investors due to the simplicity of the structure. A negative with investing in these types of funds is that the investor will never beat the market. However, beating the market is usually not sustainable in the long run. In my humble opinion, these index funds are excellent investments second only to ETF’s.
Yesterday, I work with an old friend in finishing a paper that was focused on controlling costs and project management. This paper was interesting, from the financial perspective, for numerous reasons. First, project management is viewed by scholars as a completely separate entity from other specialties in the business arena. However, in a closer review, project management is actually intertwined with numerous other specialty areas in business especially finance. For example, before project can commence, a financial projection must be done. However, the financial projection cannot be done without the input from various entities such as managers and frontline workers. From this, my take away was that most scholars may consider this a separate entity, however, in my most humble of opinions, the specialty is actually intertwined and cannot function without the cooperation in the application of other business specialties.
For today…I will be working with student to apply various concepts of Excel to organize financial information for a CEO and CFO. Some of concepts that we will be using our graphing, sorting, various calculations, and if then statements. Three using all of the various tools XL offers, multiple variations of data may be constructed, depending on the end user’s needs. From this, a better understanding of raw data will be achievable for the end-user.
During my sessions yesterday, I worked with a young gentleman on call and put options. Options are difficult concepts to understand. This is due to the numerous financial calculations needed and the seemingly contradictory meanings of various terms and applications. In our session, we started by discussing what an option really means. an option is the ability to purchase or sell something at a specific point in time. An important note to remember is that you do not actually own the underlying asset that you have the ability to sell. The two most common types of options are call options and put options. Simply put, a call option is when you have the ability to buy a stock if the stock price goes up. Contrastingly, a put option is when you have the ability to sell a stock when the price goes down. From this, there are different components to an option. The strike price of an option is the price then investor needs to stock to reach in order to start making money. For a call option, usually, the price needs to go up to meet the strike price. As for the put option, the price needs to fall in order to meet the strike price. Regardless of the option, once the strike price is met, the option is considered to be in the money. Which means, the investor makes money the further the stock price moves from the strike price. Hopefully this helps introduce the concept of options.
Finance, by far, is my most favorite subject to teach and study. However, my favorite topic and finance, is capital budgeting. Capital budgeting is my favorite for numerous reasons. First, capital budgeting has numerous applications. For example, capital budgeting techniques may be used to value a project by discounting the cash flows from the project. In addition, the same structure may also be used to value a company by discounting their dividend payments. A second reason why I like capital budgeting so much is the numerous finance concepts tied into the subject. To illustrate, capital budgeting uses the present value formula, the dividend discount model formula, and the NPV. In working with this subject, I get to refine my skills in various finance topics in one problem.
Yesterday, I worked on a case study with a nice gentleman from Singapore. In this case study, we examined a multinational corporation’s financial statements. Through this examination, we identified numerous benefits that the company may exploit through changes in their operations and financial structure. First, the return on equity and return on assets was lower than the industry standard. Further, the company’s debt to equity ratio was extremely low as well. By identifying these components, a strategy was devised which would help maximize shareholders’ wealth and increase cash flows for the firm. The strategy was for the company to increase their debt ratio and sell fixed assets that are not critical for operations. Increasing their debt ratio will in turn increase the return on equity. This is because the company will continue to generate sales with less equity in the company. From this, return equity is increased. Further, the return on assets indicated that their fixed assets were not being used to their optimal capabilities. By liquidating some assets, growth in sales will not be impacted and the firm will be making the same amount of money if not more with less assets invested. Compiling both of these strategies and implementing them, core competencies may be developed by the company, which will lead to elevated revenues and maximize wealth for the shareholders.
Yesterday, I worked with a gentleman in reference to a solar panel project assignment. In this assignment, we examined the various costs related to installing a possible solar panel electrical unit in a place of business. From this examination, we identified the various cost-saving items in the proposed project. Next, we contrasted the cost savings with a traditional purchase of electric from the power company. Through this examination, we applied various financial concepts such as discounting cash flows, the present value, and IRR. Through the review and examination of the homework assignment, we noted that installing the project would be beneficial.
Yesterday, I work with the students regarding math structures. Specifically, we work through probabilities and graphing. Usually, I do not tutor math online. However, since I used to work with the student and his finance class, I made an exception. A sample of the problems that we work through was using frequency to identify the mode, meaning, a median of a set of numbers. From this, we also had a graph the various numbers. Understanding these concepts are important because students must be able to use the mathematical concepts and finance. For example, the standard deviation is a core foundational concept taught in most finance classes. Understanding this concept will help investors determine the risk for investment or group of investments. From this, they will be able to identify whether the return is worth the risk. From this, an educated, logical approach to investing will be possible. In addition, this practice will eliminate some bias from the investment practice.