Risk-neutral valuation is simple, elegant and central in option pricing theory. However, in teaching risk-neutral valuation, it is not easy to explain the concept of quot;risk-neutralquot; probabilities. Beginners who are new to risk-neutral valuation always have lingering doubts about the...

This paper presents how marketing concepts and tools may be applied in investment appraisal studies. The marketing evaluation process begins with a description of the project concept based on the market need the project aims to satisfy. This aids the definition of the project's relevant market...

In this teaching note, we discuss the basic principles for tariff setting. Tariff setting is very important for regulated industries, such as water and power. The tariff should provide an appropriate risk-adjusted return to the investor. If the tariff were too low, then the investors would not...

Debt financing with subsidizes interest rate has a multidimensional impact on the firm. Value of the levered equity, value of the debt and overall firm value will be different of those values with debt financing at market rate. Subsidized interest rate on debt does not create any additional cash...

Although perpetuities are somewhat artificial in the sense that in practice they do not exist, they are relevant because no matter how detailed and complex a forecasted financial plan for a firm or project could be terminal value usually is calculated as perpetuity. This terminal value might be...

In this work we explore the effect of book value leverage upon some financial indexes, such as real growth, payment terms from suppliers and gross and operating margins. We explore if there is statistical evidence on the influence of the book value leverage level in the financial distress or...

In this work we explore several hypotheses about the effect of leverage upon some financial indexes, such as real growth, payment terms from suppliers and gross and operating margins. We explore if there is statistic evidence on the existence of the influence of the book value leverage level in...

In cash flow valuation (CFV), there are two main categories of mistakes: derivation of the appropriate cash flows and estimation of the cost of capital. A simple-minded view of the world would suggest that with near perfect capital markets, the presence of arbitrage would severely punish wrong...

There are many different ways to calculate the Weighted Average Cost of Capital (WACC) and for the beginner the plethora of possibilities may be very confusing. We present a general framework for classifying the WACCs that are applied to the FCF and the CCF. For the moment, we avoid...

For the practitioner, making sense of the bewildering number of theories on the cost of capital must be a truly challenging and daunting task. In a perfect world without taxes, the cost of capital formula for a finite stream of free cash flows, with debt and equity financing, is elegant, simple...