Cash Flow
What is Cash Flow? Cash Flow (CF) is the increase or decrease in the amount of money a business, institution, or individual has. In finance, the term is used to describe the amount of cash (currency) that is generated or consumed in a given time period. There are many types of CF, with various important…
Incurred
What Does Incurred Mean? Incurred is an accounting term that means that all transactions, regardless of their nature, must be recorded when they occur. It means that an accountant must recognize and record the transaction on the date when it occurred rather than on the date when the transaction was actually paid. Incurred Losses Incurred…
Equivalent Annual Annuity (EAA)
What is the Equivalent Annual Annuity? Equivalent Annual Annuity (or EAA) is a method of evaluating projects with different life durations. Traditional project profitability metrics such as NPV, IRR, or payback period provide a very valuable perspective on how financially viable projects are overall. EAA is a metric used to determine how financially efficient projects…
Risk-Free Rate
What is Risk-Free Rate? The risk-free rate of return is the interest rate an investor can expect to earn on an investment that carries zero risk. In practice, the risk-free rate is commonly considered to be equal to the interest paid on a 10-year highly rated government Treasury note, generally the safest investment an investor…
Expense Ratio
What is the Expense Ratio? An expense ratio is a fee charged by an investment company to manage the shareholders’ funds. Investment companies such as mutual funds often incur various operating expenses when managing investors’ funds, and they charge a small percentage of the funds under management to cover the expenses. Some of the expenses…
Default Risk Premium
What is a Default Risk Premium? A default risk premium is effectively the difference between a debt instrument’s interest rate and the risk-free rate. The default risk premium exists to compensate investors for an entity’s likelihood of defaulting on their debt. What determines the default risk premium? Default risk premiums essentially depend on a company…
Debt Service Coverage Ratio
What is the Debt Service Coverage Ratio? The Debt Service Coverage Ratio (sometimes called DSC or DSCR) is a credit metric used to understand how easily a company’s operating cash flow can cover its annual interest and principal obligations. Because the Debt Service Coverage Ratio also includes principal obligations in the denominator, it’s considered a…
FCFF vs FCFE vs Dividends
FCFF vs FCFE vs Dividends All three types of cash flow – FCFF vs FCFE vs Dividends – can be used to determine the intrinsic value of equity, and ultimately, a firm’s intrinsic stock price. The primary difference in the valuation methods lies in how the cash flows are discounted. All three methods account for…
Capital
What is Capital? Capital is anything that increases one’s ability to generate value. It can be used to increase value across a wide range of categories, such as financial, social, physical, intellectual, etc. In business and economics, the two most common types of capital are financial and human. This guide will explore all the above…
