Remember what I posted on the 7th of February, 2022:
https://bit.ly/3NC9y1f
On the 22nd of March, 2022, it is required for high school students in Florida to take a financial literacy course before graduation.
Financial literacy has always been important and many people, especially young people, has not had the tools to develop their understanding towards finance and investment management.
This knowledge is required.
Countries educating their youth on finance and investment will be more likely to reap the rewards in the future as the youth will be able to make sound financial decisions without squandering their time, money, as well as their country’s wealth.
In this article, I try to idealize a world in which financial literacy is prevalent, elaborating on what could be done to increase financial literacy and how it could change the financial decisions of current and next generations while also providing some snippets and true stories from my own life. I also briefly investigate how financially literate generations will impact the world we live in macroeconomically.
Tag Archives: Financialliteracy
Financial Accounting is a forensic tool! This time, the focus is accounting for receivables! Detecting frauds ranging from channel stuffing and bill and hold to roundtripping
Ability to use financial accounting at expert level gives the user a forensic tool.
Accounting frauds and schemes will become easier to detect, solve, and track when one masters it.
Innumerable scandals in the business world have been related to accounting frauds and they are still happening (why it is so is a long debate)
For example, think of a retailer having a hard time to hit its fourth quarter sales target. The trend shows that it will not hit the target by quarter end. However, by a sleight of hand, it magically hit the revenue target.
Where would you look at first? Which accounts and ratios would lead you to the detection of these inflated revenue numbers?
While answering all of these questions, I will also provide you with some recent examples of accounting scandals and how you could have detected them in the first place. I will also present you with some additional resources concerning the topic.
On investment decision rules in finance and why using payback period method misleads you
On investment decision rules in finance ⚠️
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There are many decision and investment rules in finance.
Although there is only one rule that trumps every other, inferior methods are still being used by many companies, even by the most successful ones.
Granted, regardless of whatever investment rule your company is using, estimating future cash flows is an uncertainty for each method.
However, this reality does not change the fact that there is still only one superior investment rule through which you can make sound decisions.
For example, which project would you choose if you were to use payback period method?
Project A requiring an initial investment of $100MM is projected to yield $20MM, $30MM, $50MM, and $35MM for the next four years.
Project B requiring an initial investment of $100MM is projected to yield $50MM, $30MM, $20MM, and $35MM for the next four years.
While solving the question above, I will also demonstrate why payback period may not be reliable in assessing financial viability of projects and what method you should have used given these inherent problems of the payback period.
Deciphering financial ratios that could lead to bad management and investment decisions
Test your finance and accounting skills! 💹
This time through a story!
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You are a buy-side equity analyst.
You are poring over financial statements of different companies.
You are looking for a company that has showed strong growth potential in the last 5 years although you are aware that past-performance may not always be a good indicator for future performance.
After weeks of hard work, you think you found one: Ace Chemicals.
Its net revenues have been growing so have its net earnings.
Then, you remembered what your fellow classmate, who is also working as a buy-side equity analyst at a competitor firm and with whom you discuss financial markets superficially, had said about this company a few weeks ago: “I went to their factory. The place was falling apart…”
So, “How was that possible?”, you asked yourself.
“The company has been growing, at least based on the metrics that I think are important.
I also looked at the ratio, according to which the company was in a good position regarding its investments in physical assets”
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Yes, it is possible and in reality, this company is not growing.
It escaped your notice as you did not look at the most important metric revealing a company’s operational performance clearly.
What is it?
What was the ratio tricking you into believing that the company was investing in physical assets (and in fact, it was not)?
Solution to Management Science Series #178: Real-world example: Bottom up beta 🧮Workday, Adobe, Salesforce
Real-world example: Bottom up beta
8 years ago, you co-founded a SaaS company, ‘The Blue Hedgehog’ with your fellow classmates from Cornell University.
You want to estimate the equity beta of your company by using a bottom up beta.
Although there are not many comparable companies, you think that Salesforce, Adobe, and Workday are fair comparables given their business models and their business strategies.
Check whether these companies have a similar operating leverage.
The tax rate for your company is 21%.
Use current risk-free rate and assume that equity risk-premium is 6%.
Calculate the equity beta of your company given that its debt-to-equity ratio is a stable 45% for the last 5 years by using bottom-up beta method.
What would the equity beta of the Blue Hedgehog have been if the required return on the company stock had been 15%?
Compare your results!
Note: Solution of this question, as well as those of all the questions asked so far, is shared on my website.
Solution to Management Science Series #177: How to estimate beta in mergers and acquisitions: Real-world example 🧮 Nvidia and Texas Instruments
How to estimate beta in mergers and acquisitions: Real-world example 🧮
NVIDIA’s top executives are looking for potential targets that could provide economies of scale and scope.
They consider Texas Instruments a top candidate.
Estimate the post-merger beta of NVIDIA for the following two scenarios!
Scenario A: Assume that NVIDIA will pay in equity for this acquisition. Assume that the acquisition will take place on the 31st of December, 2023.
Scenario B: Assume that NVIDIA will issue bonds worth $12B and fund the rest with equity. Assume that the acquisition will take place on the 31st of December, 2023.
Note: Solution of this question, as well as those of all the questions asked so far, is shared on my website.
Solution to Management Science Series #176: Estimating the optimal WACC 🧮
You have calculated the unlevered beta of Adobe as 0.79. Adobe’s cost of debt is estimated to be 3% as of August 2024.
For the risk-free rate, use the current yield on 10-year US Treasuries (20th of August, 2024). Equity risk premium will be 6.5%.
Corporate tax rate for Adobe is 21%. You want to investigate how the WACC of Adobe will change in changing capital structures.
Assume that the cost of debt for Adobe increases with the amount of debt in the capital structure, by 2.75% at each 15% incremental increase in the debt-to-asset ratio.
Investigate how the cost of equity and WACC will change with changing debt-to-assets ratios, i.e. start from 0% and incrementally increase it by 15% and stop when the ratio hits 90%.
Plot the cost of equity, cost of debt, and WACC at changing debt to asset ratios!
Calculate the optimal value of WACC!
Solution to Management Science Series #175: Accounting for PP&E: Investigating Apple 🧮
1. What was the original cost of Property Plant and Equipment disposed of in 2020? Assume that all purchases in 2020 were made in cash (neither equity nor debt financing). Assess the feasibility of this assumption.
2. What was the Accumulated Depreciation on the Property Plant and Equipment sold in 2020?
3. Are Apple’s Property, Plant, and Equipment more or less than half way through their useful lives on average? How did you know? Assume there is no salvage value on PP&E Apple currently holds.
Note: Solution of this question (and those of all the questions asked so far) is shared on my website.
Solution to Management Science Series #174: Capital Structure and WACC🧮
You have calculated the unlevered beta of Adobe as 0.79 (actually, this is the answer of the question posted on the 4th of January, 2025. If your estimate were different from that value in higher orders of magnitude, you should check your model and assumptions).
Adobe’s cost of debt is estimated to be 3% as of August 2024.
For the risk-free rate, use the current yield on 10-year US Treasuries (9th of August, 2024).
Equity risk premium will be 6.5%. Corporate tax rate for Adobe is 21%.
You want to investigate how the WACC of Adobe will change in changing capital structures.
Assume that the cost of debt for Adobe does not increase with the amount of debt in the capital structure (seemingly not realistic but there are such cases; do you know why?).
Investigate how the cost of equity and WACC will change with changing debt-to-assets ratios, i.e. start from 0% and incrementally increase it by 15% and stop when the ratio hits 90%.
Plot the cost of equity, cost of debt, and WACC at changing debt to asset ratios!
Solution to Management Science Series #173: How to estimate project betas 🧮Adobe Example
How to estimate project betas 🧮
Adobe plans to invest in a project, risk of which is similar to company’s own risk.
Nonetheless, Adobe plans to finance this project with only equity (100% equity-financed).
Estimate the beta of this project!