Finance / July 27, 2018 / Hana Cannon
Cost of Equity is the rate of return a shareholder requires for investing equity into a business. The rate of return an investor requires is based on the level of risk associated with the investment, which is measured as the historical volatility of returns. A firm uses cost of equity to assess the relative attractiveness of investments, including both internal projects and external acquisition opportunities. Companies typically use a combination of equity and debt financing, with equity capital being more expensive.
Daily compounding interest refers to when an account adds the interest accrued at the end of each day to the account balance so that it can earn additional interest the next day and even more the next day, and so on. To calculate daily compounding interest, divide the annual interest rate by 365 to calculate the daily rate. Add 1 and raise the result to the number of days interest accrues. Subtract 1 from the result and multiply by the initial balance to calculate the interest earned.
A current liability is an obligation that must be repaid within the current period or the next year whatever is longer. In other words, it’s a short-term loan or long-term debt that will become due in the next 12 months and require payment of current assets.
Free cash flow (FCF) measures a company’s financial performance. It shows the cash that a company can produce after deducting the purchase of assets such as property, equipment, and other major investments from it’s operating cash flow. In other words, FCF measures a company’s ability to produce what investors care most about: cash that’s available be distributed in a discretionary way.
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