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Stock-based compensation or employee stock options have become popular today. It is used to attract, motivate and retain employees. Therefore it is imperative to account for the impact of stock-based compensation or employee stock options when you value companies. So how do you deal with stock-based compensation in your valuation model? We address this question on this page.

CFAs and MBAs will encounter the word beta early in their finance courses. Beta is a critical component in corporate finance. There are different types of betas and multiple aspects to betas. There are different types of betas and multiple aspects to betas This article considers the various aspects of beta in finance. 

Publically listed companies have to disclose specified information on their taxes in their annual reports/form 10-Ks. This includes:

Effective tax rate for years covered.The income tax benefit or expense.The components of deferred tax assets and deferred tax liabilities.Reconcillation of the differences between the US statutory rates and income tax expense reported in the income statement.Actual taxes paid.Expected changes/risks involved in any tax positions taken.Allowances that may impact tax liabilities; and more.

These disclosures are found throughout the 10-k starting with the MD&A all the way up to the notes to the financial statements.

But when valuing an asset, we are interested not in the past but the future. We are trying to estimate the free cash flows of the business. Taxes will impact our free cash flows. In this context, what can actual taxes paid tell you about future cash flows and valuation?

Investors look at a variety of valuation multiples when making investment decisions. A fundamental valuation multiple investors traditionally look at is the PE ratio which is the ‘Price-Earning’ ratio. The PE multiple is calculated by dividing the share price/earnings per share or Equity Value/Net income.

Traditionally, the PE ratio has hovered around the 10-15x range. Of course, the good companies have taken on valuations on the higher end (around 15x earnings) and mediocre companies around the lower range (around 10x earnings). Exceptional companies with high growth and good operating margins have seen PE ratios around 30x earnings. These include well-regarded companies such as Google, Apple, and Microsoft. Many analysts have been screaming overvaluation whenever they see high PE ratios!

Today, we see many companies valued at 100x earnings. Many of these companies do not even have earnings. Can we justify these valuations? When? We address these questions here.

Companies can either buy or lease assets it needs on a long-term basis. For example, a firm can buy a truck required for the business or lease the truck. A company usually leases a long-term asset if it either 1) does not have the money to buy it and 2) does not want to borrow the capital required to buy these assets. The business case should be the driver of this decision. Sometimes, companies may lease the asset because it does not have money to buy the asset or wants to avoid taking on more debt. Accounting rules specify the conditions required to treat an operating lease as a capital lease and capitalize it.

What impact does capitalizing an operating lease have on the cash flow statements? We address this question here with a live Microsoft Excel model.

Companies can either buy or lease assets it needs on a long-term basis. For example, a firm can buy a truck required for the business or lease the truck. A company usually leases a long-term asset if it either 1) does not have the money to buy it and 2) does not want to borrow the capital required to buy these assets. The business case should be the driver of this decision. Sometimes, companies may lease the asset because it does not have money to buy the asset or wants to avoid taking on more debt. Accounting rules specify the conditions required to treat an operating lease as a capital lease and capitalize it.

What impact does capitalizing an operating lease have on the Income statement? We address this question here with a live Microsoft Excel model.

Companies can either buy or lease assets it needs on a long-term basis. For example, a firm can buy a truck required for the business or lease the truck. A company usually leases a long-term asset if it either 1) does not have the money to buy it and 2) does not want to borrow the capital required to buy these assets. The business case should be the driver of this decision. Sometimes, companies may lease the asset because it does not have money to buy the asset or wants to avoid taking on more debt. Accounting rules specify the conditions required to treat an operating lease as a capital lease and capitalize it.

What impact does capitalizing an operating lease have on the income statement? We address this question here with a live Microsoft Excel model.

Many of our students mix up the difference between sustainable growth rate and internal growth rate. We address the difference between sustainable growth rate and internal growth rate on this page.

Most companies benefit from R&D spending in the form of acquired know-how. This acquired know-how is a valuable asset that produces cash flow in the future. Analysts and investors should want the value of R&D spending in the balance sheet. So R&D should be treated like another investment and the R&D spending capitalized like other assets such as an investment in a building.

How does capitalizing R&D expenses impact the cash flow statements?