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Tutor profile: Alejandro M.

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Alejandro M.
CFA Charterholder and MBA. Expert in financial markets.Proficient / Excel.
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Questions

Subject: Economics

TutorMe
Question:

Help me to understand this... I am watching all over the news that there is a trade war between China and EEUU but in a trade war what are the countries that are impacted the most?

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Alejandro M.
Answer:

In order to understand the impacts of a trade war, it is important to know how the growth of an economy is measured. Growth or more technically known as Gross Domestic Product (GDP) is calculated by adding consumption, gross investment, government spending and net exports (which is exports minus imports). Those countries that are going to be affected the most are the ones that rely more on the last component of that equation, Net exports, as they will not be allowed to sell their products with the same intensity to its counterpart. In the case of the USA, the component that weight the most is consumption with approximately 65% and a negative effect of net exports (imports are higher than exports). It does not mean that the USA is not going to suffer. It means that its effects will be lower than in economies that rely more on Net exports like China.

Subject: Corporate Finance

TutorMe
Question:

How and why a company decides to give dividends to their stockholders?

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Alejandro M.
Answer:

In order for a company to decide whether it should declare dividends, it has to analyze if there are projects that actually worth investing. Worth investing means that the return the company will achieve from the investment of the target project has a higher return than its weighted average cost of capital. The weighted average cost of capital (WACC) is simply the average rate to which the company expects to pay to all of those who owe and its investors. If the rate of return of a new project is not higher than this WACC the company can decide to return to its investors part of their investment through dividends.

Subject: Finance

TutorMe
Question:

Financial Markets: I have watched recently the news and I have seen that stocks have dropped more than 20%. How and who decides the price of any single stock?

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Alejandro M.
Answer:

First, there is no a single person who decides the price of stocks. The price of stocks is determined by supply and demand in the financial market. There are many ways to value a company and one and most commonly used by analysts is discounting the future cash flows of the company. The process is this: 1. The analyst should project -according to several conditions and variables of the market and the economy including but not limited to GDP, Inflation, Interest rates- the periodic cash flow -the cash left after paying costs and expenses every period. 2. It is recommended that the analyst project at least 5 periods. 3. Once the analyst has her projections we will proceed to discount every single cash flow, which simply is bringing those future cash flows to the present. 4. It is done using a discount rate. 5. Adding the present value of those cash flows will let the analyst know the total value of the company. 6. Last, the analyst will divide this value by the number of shares. 7. This value is not necessarily the same any person can see on a daily basis on the news (actually normally is not the same) but is an approximation for traders and investors about the true value of a company. If economic conditions deteriorate as it is projected, then the cash flows will be lower, decreasing the present value of the company and the value per share. This is how shares increase or decrease price.

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