This report details the final three steps for building a DCF model, following on from ‘Discounted Cash Flow Analysis – Part I’ The third step is to Calculate Weighted Average Cost of Capital (WACC). WACC is the average rate at which a company is expected to pay its equity and debt holders. It is dependent…

Hypothesis testing is a method of statistical inference used to test a belief or claim about an unknown but fixed parameter θ of a population, using observed data from a subset of the population. By performing a hypothesis test on the measured sample, a statement can be made about the general population parameter θ by…

The previous article defined the idea of arbitrage and subsequently the assumption of no arbitrage within financial markets. A portfolio consisting of shares of stock, bonds and call options was considered, where the share price was modelled as a discrete random variable using the One-Step Binomial Model. The No-Arbitrage Principle states the initial value of…

The fundamental assumption of ﬁnancial mathematics theory is the notion of no-arbitrage within markets. This means that no investor can create a profit without any risk or initial investment. If this were to occur, by deﬁnition there exists an arbitrage opportunity, the exploiting of which would create a profitable opportunity. In reality if an arbitrage…

Discounted cash flow (DCF) is a fundamental valuation methodology broadly used by analysts; it forecasts a company’s unlevered free cash flow discounted back to today’s value. The model uses assumptions to simplify the financial complicity of a company. It is typically projected for 5 years and hence is sufficient for spanning at least one business…

Markets provide various information relating to stocks, bonds, material prices, Mergers & Acquisitions and Initial Public Offerings. Financial analysts conclude trends and try to build financial models from existing data. This helps firms to identify statistical influences in areas such as financial performance, market research and monitoring changes in the business environment. Mathematical methods can…

In part 1, a brief background on fundamental analysis as a basis for making good investments was discussed. Part 2 explores the other core technique used to make investment decisions, namely technical analysis.   The human genome has not changed substantially since stock trading first began in 1611. Behavioural economics indicates that human’s psychological, cognitive…

Monopoly Have you ever played Monopoly? When I was younger, I played often enough that the complex strategic nuances of this apparently innocent family game soon became evident. To win Monopoly, you have to exploit people’s misconceptions of property value. The navy blue properties, at the end of the board cycle, are the most expensive…