Tutor profile: Ryan N.
Subject: Personal Finance
What are some large expenses that are coming up in the next five years and how should you start planning for them now?
It is always good to have a plan for the future when it comes to your finances. Financial emergencies pop up way more than an "emergency" should! This is why you have an emergency fund with at least $1,000 saved up, in addition to contributing every single month to a savings account, an addition to any IRAs or other retirement accounts that people of all ages should form once they are in their twenties. It doesn't matter if you can only afford to contribute $20 a month to your savings or IRA account, because over time that will be worth a large amount of money, especially if you are investing some of that money in products such as Triple-A rated Government and Corporate Bonds, index funds, value mutual funds, and other quality ETFs. Even 10 dollars per month (10!) invested at 5% per year is worth over $2,600 in 15 years. Always save and always invest a portion of your take home pay and keep that emergency fund over $1,000 at all times if possible.
If you are evaluating two independent projects and only have a certain amount of capital to invest, what are some of the notable metrics you want to look at in order to measure the potential success of the project and whether to proceed with one project vs another?
You would want to calculate certain metrics such as your net present value (NPV) from using a discount rate, compare internal rates of return (IRR), payback periods, discounted paybacks, modified IRRs, profitability index, etc. Projects with higher NPVs and higher IRRs with shorter payback periods, along with a higher profitability index are the best potential projects to invest in.
A company very often needs to raise capital to perform projects or invest in new equipment, materials, etc. When raising capital, is it typically more expensive to issue debt or equity (stock)?
In most situations, it is more expensive to issue equity compared to issuing debt. We would use our CAPM model to calculate some cost of equity, and it is almost always higher than that of the cost of debt. In addition, the interest on the debt a company would issue would be tax deductible, serving as another advantage for doing so.
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