Simon Taylor's Blog
* The weighted average cost of capital, or WACC, is used in valuing companies. A standard approach to valuing companies, often called the discounted cashflow or DCF method, is first, to estimate the cashflows that the company will generate in future, … Continued
Free cashflow means cashflows generated by a company in excess of all its operating and investing needs. It’s not free in the sense of “costless”, rather it’s available for distribution to capital owners, or for re-investment in the business. * … Continued
This page brings together a number of posts that I call key financial concepts. Each is explained simply for non-experts, mostly without any diagrams or equations. They are intended to be helpful to students or anybody just curious about finance. … Continued
A key question in corporate finance is, how should companies decide when to invest the funds at their disposal? The best answer provided by financial economics is to use the net present value (NPV) rule. Here I want to show … Continued
The two foundational concepts in financial economics are: i) risk and return tend to go together, which we explore here; and ii) diversification is a good thing. * The old European proverb, don’t put all your eggs in one basket, captures the benefits … Continued
There are two basic, common-sense principles at the heart of finance theory. The first is that risk and return tend to go together, in other words, if somebody offers you an investment which promises to be both low risk and high return there’s probably something wrong with it. And the second … Continued
The cost of equity is the return that equity investors need to be paid, or to expect to be paid, as compensation for bearing equity risk. That’s the the systemic, undiversifiable risk risk you have to bear if you hold a well-diversified equity portfolio,. It’s a … Continued
A key concept in the theory of finance is the risk-free rate of interest, a rate that an investor can achieve at zero risk of a loss. It is the minimum return to compare with the higher expected returns on … Continued
Bubbles are an enduring feature of financial and commodity markets. But it is when they are driven by debt that their bursting becomes dangerous * The best book I’ve read on financial bubbles is William Quinn and John D. Turner’s … Continued
China’s growing nuclear weapon capability risks overturning the relative stability of nuclear deterrence based on only two adversaries * Chinese author Liu Cixin’s novel The Three-Body Problem was an international best seller, and was later turned into a really interesting, … Continued
Selling shovels instead of trying to find gold is an old piece of wisdom about booms and bubbles * It’s a cliché about booms and bubbles that you can probably more dependably make money from selling shovels than actually finding … Continued
Real assets are the assets that companies seek to acquire, to build and to invest in. Financial assets are the resources that they raise to allow that to happen. The distinction underpins what we call corporate finance – the financing of corporations. * When economists … Continued
Latest data show that the US dollar remains the dominant trading currency globally, and is still the pre-eminent foreign reserve currency, though slowly losing ground, mainly to other developed country currencies. * Perhaps the question I have been asked most … Continued
A particular case of asymmetric information is where one person, who we call the principal, wants to get another person, who we call the agent, to do something on their behalf. This situation is known as the principal-agent problem, or more simply … Continued
Asymmetric information is where two people doing business together have different levels of information about something important to the transaction, meaning that one may be able to take advantage of the other. It is very common in economic life. * Information is … Continued