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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.
Over the last several days, I have had numerous students requesting sessions in reference to cash budgeting. Cash budgeting helps a business project cash flows over a specific period of time. To accomplish this task, owners or managers must identify potential cash inflows over this period. Next, management must identify when cost will need to be paid. From this, a net cash inflow/out for is determined. The final step is to identify how additional funds may be obtained to cover a cash shortfall or how funds will be invested in the event of excess income. The end result is an in-depth understanding of the cash position for the company.
Students should understand this topic because knowing the cash position for a company will better help entry level employees offer advice for cash management to employers. Further, an in-depth understanding of this topic will solidify other finance topics learned in your classes. From this, a solid foundation for understanding the totality of the class is possible. On a final note, the skills learned from understand this topic may be transferred to your personal finances as well.
Yesterday, I work with the students who needed help with value in a stock using the non-constant growth formula. These types of problems are challenging for students for a couple different reasons. First, there are a couple different formulas involved in cells in this type of problem. The first formula used is a present value formula. This formula is used to discount dividends for the first few years. You continue this until you finally run into a constant growth portion of the problem. Once at this point, you would now use the second formula which is the constant growth formula. In doing this, the trick to solving this problem is to know that you have to calculate your dividends for one year past the constant growth starting point. Once all calculations are complete, then you add the sum of all the present values. From this, you have your present value of the stock.
Today, I worked with a student regarding behavioral finance. Behavioral finance is a relatively new area of finance, which is built off of the traditional finance theory. The basis of behavior finance is that investors do not invest for optimal returns. Instead, investors have individual biases in which they inadvertently applied to the refinancing decisions. Some of the behavioral biases are overconfident, mental accounting, anchoring, and loss aversion. By applying these various biased, unbeknownst to the investor, maximum returns, with minimal risk, is improbable. By exploring the various bias, investors may be cognizant of the issue and take steps to rectify or at least mitigate the challenge.
Yesterday, I helped a student to do a valuation for Kraft Heinz. In doing this valuation, we focused on the stock price. First, we were tasked to evaluate the economy, industry, and the company. Currently, the state of our economy is in an expansionary period. This means, that the economy is growing in the businesses are investing in growth. Further, since interest rates are so low, numerous companies are refinancing their debt to a longer-term and lower rates. These actions allow for the companies to have more funds to reinvest in the business. As for the industry, the company competes in the food and beverage industry. This industry is usually a good investment because the industry usually grows regardless of the economy. This is evident because everybody of course needs food. As for the company, Kraft Heinz just completed a merger. Further, the architect of this merger was Warren Buffett. Because of the merger, return on equity was quite low. However, numerous articles indicated that a restructuring was taking place. Based on the totality of information, The investors definitely purchase the stock.
For today, I will have a tutoring sessions focused on the valuation of Sprint. A valuation is determining the value of the company or project by using publicly available information and sound financial theory. Students need to know the valuation processes for future job positions in finance. The benefits of doing a valuation will allow investors to better understand the underlying value of a project or company, for this particular assignment, Sprint. Further, by understanding the different evaluation processes, students will have a more in-depth understanding of the difference revenues for a company. On a final note, knowing the different valuation processes will improve the students grade.
Valuation is a complicated topic for numerous reasons. First, the valuation process uses numerous finance concepts such as the time value of money, calculating the cost of equity, cost of debt, and finding the free cash flow for company. Further, international valuations are more complicated due to understanding transaction and translation cost. However, once students have a firm grasp of international valuations, job opportunities may open up with multinational companies and large foreign investors.