Introduction and Core Concepts

Question 1

Briefly explain the time value of money

Answer 1

Money today is worth more than the same nominal value at a point in the future

Question 2

Why does the time value of money exist?

Answer 2

It is not (primarily) because of inflation, although this does reduce the purchasing power of money. Instead, it is usually attributed to that you are able to invest the money today and earn more in the future; there is an opportunity cost to not using the funds

Question 3

All else equal, which characteristic will lead to a company having a higher WACC?
- Biotech vs manufacturing
- Higher vs lower credit rating
- Debt vs equity representing larger proportion of capital structure
- Bigger vs smaller company

Answer 3

Higher:
- Biotech
- Lower
- Equity (up to a certain point, and then debt)
- Smaller

Question 4

What is a very simple way of defining how much a company is intrinsically worth?

Answer 4

Company is worth the sum of its discounted cash flows from now into eternity

Question 5

What does the “discount rate” mean?

Answer 5

Represents your opportunity cost or the “targeted yield”. In other words, if you don’t invest in this company or asset, how much could you earn with your money if you invested instead in assets with a similar risk/return profile