Economic Indicators, Their Uses and Limitations
Economic indicators are variables that give information about the condition of the economy. Generally, economic indicators are grouped according to whether they are leading (forward-looking), lagging (backward-looking), or coincident (simultaneous with the economy). Leading Indicators Leading indicators include share prices,…
Cost-push and Demand-pull Inflation
Cost-push Inflation Aggregate supply is the total amount of goods and services produced by an economy at a given price level. Cost-push inflation is attributed to a reduction in the aggregate supply caused by a rise in the cost of…
Compare Inflation Measures, Including Their Uses and Limitations
There are two major measures of inflation: the consumer price index and the producer price index. Consumer Price Index (CPI) The consumer price index is an inflationary measure that considers using a consumption basket as a tool or an indicator…
Types and Measures of Unemployment
Unemployment happens when individuals who are capable and willing to work at the current wage rates cannot acquire jobs. Similarly, when there are few available jobs in an economy, and yet the labor force of that economy is growing, then…
Describe the Business Cycle and Its Phases
A business or economic cycle is defined as the persistent fluctuation in the gross domestic product of a given economy within a specified period. A business cycle can be described by periods of expansion and recessions. During a recession, the…
Money-weighted vs. Time-weighted Rates of Return
Money-weighted Rate of Return The money-weighted rate of return (MWRR) refers to a portfolio’s internal rate of return. It is the rate of discount, r, at which: $$ \text{PV of cash outflows} = \text{PV of cash inflows} $$ The money-weighted…
The Internal Rate of Return
The internal rate of return is the discount rate that sets the present value of all cash inflows of a project equal to the present value of all cash outflows of the same project. In other words, it is the…
Using a Timeline to Model Cash Flows and Solve Time Value of Money Problems
A timeline is a physical illustration of the amounts and timing of cash flows associated with an investment project. Cash flows that are regular and of equal amounts can be modeled as annuities. In such exam problems, all you have…
Categories of Valuation Model
Free Cash Flow to Equity (FCFE) Model Advantages: aims to calculate a company’s capacity to pay future dividends, going beyond simply discounting expected dividends. This approach may provide a more useful valuation, especially when the company does not pay dividends…
Asset-based Valuation Models
An asset-based valuation of a company uses estimates of the market or fair value of the company’s assets and liabilities and, thus, is most appropriate for companies with a high proportion of current assets and current liabilities and few/insignificant intangible…
