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…
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…
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…
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…
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 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…
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…
What is Time Series Data Analysis? Time series data analysis is the analysis of datasets that change over a period of time. Time series datasets record observations of the same variable over various points of time. Financial analysts use time series data such as stock price movements, or a company’s sales over time, to analyze…
What is Income? Income refers to the money that is earned by an individual for providing a service or as an exchange for providing a product. The income earned by an individual is used to fund their day-to-day expenditures, as well as fund investments. Some of the most common types of income include salaries, revenue…
Debt vs Equity Financing: Which is Best? Debt vs Equity Financing – which is best for your business and why? The simple answer is that it depends. The equity versus debt decision relies on a large number of factors, such as the current economic climate, the business’ existing capital structure, and the business life cycle…
