Their foresight helped them make gobs of money while Wall Street institutions crumbled. So here is your cheat sheet for The Big Short, in three simple questions. The linkage between Wall Street and Main Street was, for the most part, established when the finance industry created securitization in the s and was mass-commercialized in the s by the now defunct Salomon Brothers. Large financial institutions like investment banks or quasi-government agencies like Fannie Mae first pool together several hundred mortgages.
It is about analyzing the future potential of a stock, of which valuation is but a component of it. You should be focusing on the insights related to the long-term value drivers of a company. The expected value of the share price N months from the last fiscal year end is estimated as: The modeling of Net Income for financial institutions is an advanced topic and depends on the type of financial institution, i.
For the balance sheet: And for equity value: In other words, if a company has an ROE equal to its cost of capital, its value should be exactly equal to its book value.
It is a measure of economic rents or value added for each period.
An alternative is to anchor it on current earnings. As we derived in a different blog, the value of equity can be derived as: Compared to conventional, DCFs, these models allow the value derived in a valuation to be attributed to earnings growth of different time horizons.
By separating out the value due to earnings growth from different horizons, we can look at the margin of safety built into a certain valuation.
Value from near-term earnings growth are more certain than those in the future. This term is positive not only if there is earnings growth, but that the earnings growth is value creating, i. An alternative decomposition anchors the valuation based on earnings in the next period.
The formula is slightly different [See reference 1] Variations V — Assets, Earnings Power, Growth Some authors argue that conventional discounted cash flows are flawed in two ways: Instead, they propose to value a company in 3 steps: When a company is able to earn in excess of what is expected, the value of earnings power without growth is its earnings divided by cost of capital.
To value growth, instead of conducting a detailed DCF, growth is valued by computing a growth factor F where g is a growth rate to perpetuity and ROIC is a perpetual return on capital.
Value of operations is then In the Variations VI, you can see a similar formula being applied to the terminal value. This method is often used to infer how much return on capital and growth rates need to be. Variations VI — Advanced Perpetuity Formulas The basic formula tends to over-estimate by assuming companies will continue to earn high returns, or under-estimate if the company is still growing rapidly compared to its return on capital by the end of the explicit forecast period.
A more advanced formula is as follows: This formula accounts for the fading of return on capital over time. Analysis Tools in the CandidMarkets platform let's you use any of the methods above in a flexible way so you only need to focus on the inputs and assumptions, not getting the model to work.The Comprehensive Cheat Sheet for Valuation Models From Finance to Dazzling Your Interviewer.
Here’s a cheat sheet to help you create your valuation models and for your interview preps. Introduction to Corporate Finance MOOC: Module 2, Capital Budgeting Notes Capital Budgeting: NPV & IRR Net Present Value (NPV) The sum of all discounted cash flows, including all the costs and benefits.
Microsoft Word - Module 2 Cheat Sheet barnweddingvt.com Created Date. Financial Math Formulas and Financial Equations. Financial math has as its foundation many basic finance formulas related to the time value of money.
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Finance CORPORATE FINANCE COURSE SYLLABUS Prof. Simon Gervais Fall – Term 2 book exams, but you will be allowed to bring one “cheat-sheet” on which you can write down some notes. Duke University, Corporate Finance (Finance ), Course Syllabus.