3 ms·

They are related but different concepts. The value of a company is equal to the discounted value of its future cash flows. If rates go up, that means a higher r

They are related but different concepts. The value of a company is equal to the discounted value of its future cash flows. If rates go up, that means a higher return can be had for zero risk, which means all cash coming in the future at more than zero risk is now worth less. There is a second term other than risk free rate in the discounting equation which is related to capital structure. So, amount and cost of debt does impact valuation (though there is some debate and theory that makes my statement not quite true), but it is not the only factor.

MuffinFlavored 4y ago
Are you saying in a perfect world, the perfect CEO would "can" (get rid of) every team/project that isn't projected to 5% ROI yearly (assuming risk free rate has roughly gone from 0.25% -> 5%)? Obviously there are exceptions where you want to eat losses up from (R&D a big project for a few years hoping it returns a lot down the road)?
- formercoder 4y ago
  WACC = (E/D x Ke) + ((D/E x Kd) x (1 – T)) E = equity value D = debt value Ke = cost of equity Kd = cost of debt T = tax rate Ke = Rf + B * ERP Rf = risk free rate B = beta of company ERP = equity risk premium Kd = Rf + credit spread In theory, if a project's ROIC is less than WACC, it does not generate economic value.
  - MuffinFlavored 4y ago
    How does this apply given that we're assuming Google has enough cash on hand from profit of other aspects of their business that they do not finance most projects through new loans (debt) from banks at current interest rates because they don't need to?
    - formercoder 4y ago
      Their cash balance doesn't really matter, it impacts their cost of capital in various ways, but you can still compare the ROIC of any given project to the overall company's cost of capital.
    - pgodzin 4y ago
      Their cash balance can also make higher risk-free returns otherwise
  - sjkoelle 4y ago
    and charlie munger said he never used calculus
    - formercoder 4y ago
      That’s all algebra :)

MuffinFlavored 4y ago

Are you saying in a perfect world, the perfect CEO would "can" (get rid of) every team/project that isn't projected to 5% ROI yearly (assuming risk free rate has roughly gone from 0.25% -> 5%)? Obviously there are exceptions where you want to eat losses up from (R&D a big project for a few years hoping it returns a lot down the road)?

formercoder 4y ago
WACC = (E/D x Ke) + ((D/E x Kd) x (1 – T)) E = equity value D = debt value Ke = cost of equity Kd = cost of debt T = tax rate Ke = Rf + B * ERP Rf = risk free rate B = beta of company ERP = equity risk premium Kd = Rf + credit spread In theory, if a project's ROIC is less than WACC, it does not generate economic value.
- MuffinFlavored 4y ago
  How does this apply given that we're assuming Google has enough cash on hand from profit of other aspects of their business that they do not finance most projects through new loans (debt) from banks at current interest rates because they don't need to?
  - formercoder 4y ago
    Their cash balance doesn't really matter, it impacts their cost of capital in various ways, but you can still compare the ROIC of any given project to the overall company's cost of capital.
  - pgodzin 4y ago
    Their cash balance can also make higher risk-free returns otherwise
- sjkoelle 4y ago
  and charlie munger said he never used calculus
  - formercoder 4y ago
    That’s all algebra :)