Net Present Value (NPV) is the difference between present value of net inflows versus the present value of outflows (expenses). The net present value is a good analyst tool for measuring the profitability of a company’s project or new undertaking, like expansion into a new market. It measures the anticipated cash inflows (revenues) from the undertaking versus the anticipated costs of the new project (also in present value terms). Continue reading...
The price in today's dollars for an asset which will appreciate or depreciate to an amount which may be known at a specific date in the future. One simple example of Present Value is the amount that needs to be invested in order to grow to a specific amount later, if the rate of return and length of time are known. So if someone wanted to have $50,000 to buy a boat in 5 years, and they could get 5% on a guaranteed investment, they would need a lump sum investment of about $39,000 to get them there. Continue reading...
It depends. There are three commonly used fee structures: fee-only, fee-based, and commission-based, Advisors can be compensated in three ways: It’s impossible to say exactly how much you will end up paying for an advisor – it really depends on the type of advisor you decide to hire, the amount of trading or planning you will be using them for, and the size of your portfolio. In some transactions with commission-based planners, you may not see any out-of-pocket cost; their commissions are built into the products in such a way that it may not appear that there is any direct cost for their services. Continue reading...
Discounted Cash Flow (DCF) uses an estimated future cash flow amount and a Discount Rate to determine the Present Value (PV). An investor or business executive might project an estimated future cash flow for a business based on recent growth rates, industry information, futurism, estimated inflation, etc. The most common future cash flow to use is free cash flow, which takes out capital expenditures. Continue reading...
Future Value is the hypothetical value of an investment at a specific date in the future. The future value (FV) of an investment or business is a calculation used in several types of planning and accounting. In a Time Value of Money (TVM) calculation, the Future Value is often the starting point, and the interest rate that will be earned in the meantime is called Discount Rate, and is discounted by the number of years of periods back to the present time. This allows investors to see the Present Value (PV), which is a lesser, discounted amount from the future value, and gives us the premise for the Time Value of Money, which is that “a dollar today is worth more than a dollar tomorrow.” Continue reading...
The Gordon Growth Model is also known as the dividend discount model (DDM). It is a model for pricing a stock that was developed by professor Myron J. Gordon in the 1960s. The model uses a stock’s present value relative to the present value of its future dividends to provide an intrinsic value for the stock. The model is a shaky one at best, especially given that companies these days often change the course of dividend payments, and many (particularly in the tech world) don’t pay any dividends at all. Continue reading...
Some 401(k)s give participants the ability to make after-tax contributions, which raises the question of which fits better into a person’s retirement plan. One advantage to Roth 401(k)s is that they do not have income limits which may have barred certain high earners from contributing to a Roth IRA in the past. Down the road in retirement, it may be advantageous for someone with significant savings to be able to take some withdrawals that do not increase his or her income tax bracket. Continue reading...
The overarching theme of blockchains is that they can provide security and asset verification in a decentralized system, which is perhaps the best-known method for preventing fraud. Blockchains are a technological revolution that provides an opportunity to establish strong systems for digital identity. Here are some of the applications and uses for it: A user can authenticate a unique physical item by pairing them with a corresponding digital token. In that sense, these tokens serve to connect the physical and digital worlds. With a token assigned to each physical good, that can revolutionize supply chain management, managing intellectual property to prevent counterfeiting and fraud detection. Continue reading...
Value Stock is a stock whose price has been deemed a value buy because of underlying fundamentals, book value, and projected earnings. Prices for stocks can temporarily be pushed around by sentiment, index tracking fund purchases, news and political effects, et cetera, and often the prices on very good and well positioned companies become undervalued as part of larger movements that overlook their inherent value. Continue reading...
The "end" value at a specified date in the future of an investment or cash flow. Terminal value is a term used in value calculations looking forward toward the future value of an asset or cash flow, and also in calculations which start with the Terminal Value and depreciate the asset over the intervening years until one arrives at the Present Value. Can be used in calculations regarding a business, an index, a cash flow, or an asset. Horizon Value is a synonym, and is perhaps better suited to describe the way the calculation chooses a time horizon of a specific number of years, but otherwise uses the same numbers in an equation that will estimate the value if the business or index went on growing at the same rate into perpetuity. Continue reading...
Face Value is the nominal value of a security or currency as written/stated by the issuer. It may vary from market price, since for securities like stocks the price is heavily influenced by supply and demand. In the case of bonds, interest is usually calculated as a percentage of face value. Also for bonds, the face value is generally equal to the par value (principal), usually the $1,000 paid to the holder at maturity. Continue reading...
Intrinsic Value is the value of a security which is “built into it.” Both options and stocks have it, but it is different for each. Options and stocks have intrinsic value. For options, the intrinsic value is easy to compute, if the option is in-the-money. It is the difference between the strike price of the option and the market price of the underlying security. If an option is out-of-the-money it has no intrinsic value. Continue reading...
The Abandonment Value is the salvage value left if a capital project is stopped short at an unknown time. Authors Robichek and Van Horne (1967) offered a very concise argument for the importance of including an Abandonment Value in the calculations leading to a company decision to undertake a long-term capital project. The calculation is useful for risk assessment, and tries to find the value at which project assets could be liquidated if the project could not be continued for some reason. Continue reading...
Enterprise Value is the total cost to acquire a company. The Enterprise Value of a company is the amount that would have to be paid for full ownership of it, which would include market capitalization (price per share x shares outstanding) + net debt (all liabilities - cash and equivalents). Market cap alone is technically just shareholders equity, and not capital from debt, so Enterprise Value adds that in for consideration. Enterprise value is the numerator in EV/E (Enterprise Value over EBITDA), a very common valuation ratio. Continue reading...
Par value is the nominal value of a security (such as a stock or a bond) that is typically indicated on the certificate of ownership. Par value is most often associated with bonds, and refers to the amount that will be returned to the investor at the bond’s maturity. Par value of bonds is generally $100 or $1,000. Bonds traded on the open market are not generally bought and sold at par value, as they typically trade at a premium or a discount to par. Bond prices are influenced by interest rates, and have an inverse relationship with them. Continue reading...
Growth stocks tend to be younger companies focused on using capital to fuel more growth, whereas Value stocks have perceived safety through consistent earnings, cash on balance sheets, and dividends. Neither growth nor value stocks are the best performers for all time, and the reality is that over long stretches of time, performance tends to revert to the mean. Categorically, growth stocks tend to be younger companies that focus capital on investing in expanding operations - hiring new personnel, hiring more employees, entering new markets. Continue reading...
The Time Value of Money is a theme for discourse and calculations related to the effect of interest on money over time, and the interrelation between Present Value and Future Value. The Time in the equation of Rate of Return x Time x Present Value = Future Value has a value and an effect on the Future Value (or the Present Value depending on what you're solving for). The Time Value of Money is, at it's simplest, something which nearly everyone has seen but hasn't heard called by that name: turn this amount of money into that amount of money by letting it grow in the market for a length of time. Continue reading...
Enterprise value is an amount that would have to be paid for a company to acquire all of its equity and debt. It is notable that cash and cash equivalents are left out of this equation since that amount is netted out of a cash purchase. The basic formula for enterprise value is market capitalization + debt obligations and any minority interests or preferred shares. This regularly appears in the numerator position in the EV/EBITDA ratio. Often investors can just look at the market capitalization of a company to get an estimation of the size of the company. Continue reading...
Assessed value is used to determine the property taxes due on real estate. Assessed value is normally lower than the appraised value of a residential property, because it is not looking as much at the value of the home, but rather the value of the property, for property tax assessment. While the assessed value does have to do with the market value of real estate, most calculations only use average home prices the area, found in local real estate listings, as part of the valuation. The “ask” prices are going to be higher than the prices at which they’ll sell. Continue reading...