Anonymous asked: How does ROI differ from ROIC?
ROI = Return on Investment
ROIC = Return on Investment Capital (also known in some circles as return on capital)
Both of these are measures of a companies performance, but they differ in scope. ROI refers to the efficiency of an investment’s ability to generate a gain / loss (hopefully it is a gain or you wouldn’t undertake it) and ROIC is a measure of literally how efficiently a company is using its resources (money) to generate more resources (money).
Equations for each:
ROI = (Gain on Investment - Cost of Investment) / (Cost of Investment)
ROIC = (Net Operating Income - Dividends) / (Total Capital)
They are very similar in that they both determine the efficiency of an enterprise, however ROIC determines the efficiency of the whole company, while ROI only determines the efficiency of one particular investment.
Anonymous asked: Well, it's been a while due to midterms. Let's see..easy one, what is the difference between total funds invested and invested capital?
Haha, I thought you gave up. Good thing you did not, I like these exercises!
Invested Capital represents the total amount that shareholders and debtholders have made to your company.
Funds Invested represents what you, as the individual have given (as capital/cash) to your company. This is assuming you are the commander and chief of the company, which is for example, the case for a partnership or single proprietorship business.
Anonymous asked: Sad day with the failure of the vid-cast. Me and my fiance wanted to see our favorite relics host in action! We've seen all the other ones, but we've never seen you, as creepy as that sounds!
Tasha has access to most of the video cast material, I’ll talk to her and see if she can release a short (odds are I will be in it since I appeared in all of the video casts, barring the first).
There is still hope!
Oh and thank you for the praise haha it is most undeserving!
Anonymous asked: bps (which myself and the Brits like to pronounce as bips ) means basis point/s. 1 basis point is 1% of 1%, so if interest rates rise from 3% to 5%, it rose by 200 bps.
So the second part of my question is asking about modified duration, also
called effective duration, which is a numerical value that represents the bond's sensitivity to the market in. You can use it to figure out the percentage change in a bond's price if the yield falls by 34bps for example. The reason why it's generally only used within 100 bps is because it becomes more inaccurate the greater the change.
I'm not sure if you know how to calculate it or if you will ever need to, and even after you calculate it, you still need to know how to use it lol. If you ever feel like investing in bonds, its good to know the bond's sensitivity to rising and falling interest rates so you what bonds to buy/keep and what bonds to sell when anticipating market fluctuation, particularly drastic fluctuations.
Ahhh okay good to know!
Anonymous asked: I think it's more lack knowledge than ignorance. I'm just trying to see much you, being in accounting, know about one of my majors (finance).
First of all, here is the model: P0 = D1 / (K-g), P0 being the price, and D1 being the next value of the dividend.
The answer was quite simple. K = Dividend Yield + Expected Growth (taken from the holding period return formula and/or the intrinsic value formula when stock is priced equal to intrinsic value). Growth must be positive in this case and there must be a dividend because the model is applied to stocks with (surprise surprise) constant growth that pay a dividend. Therefore, the market capitalization rate K must be greater than the growth rate g because g is included in k.
Let's see if you know some basic bond pricing. Say you have a 4 year bond, 10% coupon, semi annual compounding, 1K par, yield to maturity 8%. What is it's present value?
Now what is it's effective/modified duration? Since I don't know if you would call it the same thing, what is its average price change for 100 bps change?
Financial Calculator to the rescue
N = 8 (8 compounding periods 4 years x semiannual = 8)
I = 4% (this refers to the yearly rate)
Payment = 1000*0.5*0.1 = 50
FV = 1000
PV = ? = 1067.327449 = $ 1067.33 (rounded to the nearest cent)
What does bps stand for by chance?
Good to know a little something about our good friend Gordon haha.
Anonymous asked: In the Gordon Model of Dividend Growth, why does the market capitalization rate have to be greater than the growth rate, besides the fact that price can't be negative and that you can't divide by zero.
Unfortunately I cannot accurately answer your question simply because, thus far in my education I have only been taught the Dicsounted Cash Flow Model for assigning dividends.
I do know however know that high growth is unsustainable in the long run, and that if one were to implement a return on equity that was higher then the companies’ growth rate, the company would be unable to sustain the dividend and keep their equity growing over the long haul.
This unfortunately is a half assed response to your question but I am unable to give a better one given my limited knowledge (read: ignorance) of the material.
Anonymous asked: Is it creepy if you're my favorite host on RoO because your voice is sexy?
Yes, but only if you obsess over it! Otherwise your simply a fan ;)
Anonymous asked: What's the difference between Accounting Profit and Economic Profit
Accounting Profit is what we record as a profit (that is revenue minus expenses) of an enterprise or company activity.
Economic Profit takes this one step further and accounts for the opportunity cost of the enterprise or company activity.
At first glance this does not make much sense, here is an example.
You are an aspiring entrepreneur in the glass window business. You set up shop (lets say you put $800,000 capital into the business for floor space, labor and what-have-you) and start building your clientele and begin conducting business. At year end, you generated revenues of $100,000 and incurred total expenses of $87,000, your accounting profit would be the difference (total revenues - total expenses), in this case $13,000 (technically you would also be taxed, and there is most likely a cost of capital but I will leave this out of the example).
During that year you generated $13,000 in accounting profit.
Economic profit takes this one step further. Assume you also had a choice to set up a hardware shop with your $800,000 capital that you would have used to set up the window business.
This is where things get technical since it is hard to measure “ifs” and “buts” but assuming you did some research on the market you would learn that during the year, beginning hardware stores received a net return on equity of let us say 1.5% (average).
1.5% of $800,000 would be $12,000.
Your Economic profit would therefore be $13,000 - $12,000 = $1,000
By investing your money in the glass window shop instead of the hardware store, for that year, you generated greater profit.
Anonymous asked: How awesome are you?
Here is a totally awesome link to a totally awesome podcast called Relics of Orr. It is a podcast about GW2, GW1 and the GW community.