Michael Taillard

Everything that makes up a corporation and everything a corporation owns, including the building, equipment, office supplies, brand value, research, land, trademarks, and everything else, are considered assets. Believe it or not, when you start a corporation, that company’s assets aren’t just included in a Welcome Letter; you have to go out and acquire them.

Corporate finance is the study of how groups of people work together as a single organization to provide something of value to society. It’s the job of those in corporate finance to manage the organization so that resources are efficiently utilized, the most valuable projects are pursued, the corporation can remain competitive, and everyone gets to keep their job.

Earned value management includes ensuring that everything remains on schedule. Time is money. So anytime that there’s a deviation in the schedule regarding when a project will be completed or when it will reach certain milestones in earned value, there’s a problem. Not only do you have a problem if you’re falling behind, which is especially bad, but you also have a problem if the project is generating value ahead of schedule to the extent that the corporation’s assets could have been managed more efficiently.

There are certain risks that no amount of diversification can eliminate. Specific risk is any risk associated with an individual investment and holds the possibility of being eliminated or greatly minimized through diversification. Default risk on a bond, liquidity risk on the corporation underlying a stock, and the risk of a building losing value in the real estate market are all specific risks.

Calculating the cost of debt is pretty simple. Debt includes any long- or short-term debt that is used to finance the operations of a business. The biggest influence on the cost of debt is simply the interest rate on debt incurred, measured by using the current value of future cash flows to repay the loans. Well, you’re looking at the same thing from the perspective of corporate costs of debt rather than investor potential for debt.

The purchasing power of a nation’s currency refers to that nation’s ability to purchase goods. Usually purchasing power is measured using a list of necessities such as certain groceries, utilities, and other requirements for daily life, but for simplicity’s sake, say that purchasing power is measured in beer. Purchasing power by itself doesn’t really mean anything, but when used to track changes over time, it helps measure inflation.

People prefer to live their lives in a fantasy. They fear what they don’t understand and dream of what they (probably) can’t attain. You shouldn’t be surprised, then, to find out that this same view influences people’s financial decisions in a behavioral fluke described as the prospect theory, which basically says this: When making financial decisions that aren’t certain (meaning that the outcomes aren’t certain but the probability of success can be estimated), people look at the potential for gain or loss instead of relying on rational thinking using the probable outcomes.