I am currently enrolled in a Big Data course and trying to understand why my VLookup Function is not working. Can you help diagnose the situation?
Absolutely! Thank you for taking
We are doing a Discounted Cash Flow (DCF) analysis on a real life company using their annual financial statements and can't seem to calculate their Free Cash Flow (FCF). Could you walk me through the proper calculation and line items?
Absolutely! Thank you for taking the time to reach out. Lets begin by defining Free Cash Flow (FCF) which is the leftover cash a firm has to expand their business after paying operating expenses which is found on the Income Statement as earnings after taxes (EAT). Cash flows are then adjusted for certain line items on the financial statements to figure out their true cash value. To do this we must subtract from EAT items such as non-cash expenses (Depreciation/Amortization), Capital Expenditures which are mandatory expenses to maintain fixed assets (land/buildings), and the increase in Net Working Capital (Current Asset - Current Liabilities). Depreciation and Amortization can be found under Cash Flow from Operations under the Cash Flow Statement as well as Capital Expenditures traditionally found under Investing activities and to use the amounts reported on the statements for the year of forecast. Net working Capital accounts are found on the balance sheet as current assets and liabilities from the current and prior year. The main reason for this is to adjust from the accrual system of accounting to find cash. Typical accounts are A/R, A/P, Inventories, Prepaid Expenses, and Accrued Expenses. An increase in an asset must be subtracted from our FCF while an increase in a liability is added. This is where I find most students have difficulty so lets look deeper. Take for example A/R (Asset), the amount of cash a company should receive for a sale but has not been collected yet. If A/R from year to year increased, then that means this is more cash that has not been collected meaning we have less cash. Now lets look at A/P (Liability), the amount of money we owe a collector but have not paid yet. If A/P increases this means we have more cash on hand because we have not actually paid our creditors. After adjusting Earnings After Tax for these cash difference we can derive a basis for a free cash flow and proceed to forecast for Discounted Cash Flow valuation. Are there any other question areas or difficulties that you may have on the rest of the analysis?
Can you please explain in detail the tools of monetary policy of the Federal Reserve? I am having trouble understanding how they they relate to the monetary supply?
Great Question! The Federal Reserve bank has 4 tools of monetary policy and influences the supply of money through the Reserve Requirement Ratio, the Discount Rate, Open Market Operations (Buying and Selling Bonds), and interest rates on excess reserves. Lets examine each tool a bit more in detail. 1. The Reserve Requirement Ratio is the amount of money that banks must hold on inventory and not lend out. Decreasing this means that banks don't need to hold onto as much and can lend out more money and thereby increase monetary circulation through the Money Multiplier Effect. Money Multiplier Effect: Lets say an architect takes out a loan to build a house and spends that money on contractors. Contractors then buy suppliers to build the house from manufacturers and then they pay their workers through wages. Suddenly that small loan from the bank trickled down into many pockets as discretionary income which increases Aggregate Demand, GDP, Inflation, and lowers Unemployment. 2. The Fed also charges Discount Rates (Interest Rate) to other banks "The Federal Funds Rate" as you may have read in the Wall Street Journal. If they decrease the interest rate, smaller banks will be more inclined to borrow from the Fed because it is cheaper. This then will therefore increase money supply through loans and the money multiplier effect.. 3. Next we have Open Market Operations which is buying and selling bonds. Lets examine this in terms of a basic transaction. If the Fed sells a bonds, then the buyer gives the Fed money in expectation of their principal and interest. The immediate outcome means that buyers have less money in circulation because they purchased the bonds and therefore decrease the money supply as the Fed is now holding onto it. 4. Finally the Fed controls Interest Rates on Excess Reserves (The amount banks have extra to lend out. If they increase interest rates, this means they decrease their lending amount which again decreases the monetary supply. It all ties back to banks make their money on loans and interest and this effects the money multiplier effect and supply of money. Remember: This is important because an increase in monetary supply increases circulation and discretionary spending and increases Aggregate Demand (C+I+G+NX). This means that GDP would increase along with Inflation, and that Unemployment would be lower. If the Fed does the inverse of any of these policies it with have an opposite effect on Money Supply.