Economic Profit

CFA Level II
#1

Noplat- cost of caital. Dumb question, how do you find total capital? Assets? Equity? Assets + Depreciation? F*%!

#2

total capital is equity plus debt think of the wacc formula - it measures the cost of debt and the cost of equity so that’s capital

#3

cost of capital=$WACC

#4

also think in common sense, you wanna start a business, what do you use to start it? borrowed money or investors money :slight_smile:

#5

I have only seen it based on beginning value of TA. This is not the same as equity + debt, but let us hope they don’t get too picky.

#6

Thanks all. I understand that completely, but where does the $200,000 from on #34 EOC Q. Reading 29…

#7

Assets.

#8

Thanks Dreary, didn’t see that post.

#9

Do we use book value or fair value of debt+equity? I think it’s book value?

#10

I think you would go with the method the company generally uses but if you’re comparing between companies then you would need to adjust to make them comparable but in a simple question the economic profit of a company would just be based on how they recognize their assets.

#11

yeah this is the part where I hate everything. Definitely in Corp Finance, Total Capital = Beginning Total Assets, but I could not guarantee that its the same thing if you are in FRA. bump!

#12

Ya it does because equity plus liabilities equals assets so it’s the same in corporate finance and accounting. The only difference is the use the word debt instead of liabilities.

#13

total capital vs total capitalization. same thing or different?

#14

Capitalization is the rate you used to discount a formula. It’s called the capitalization rate. I don’t know what total capitalization per se would be

#15

two different concepts - Total Capital is the Book value of Equity and Debt. Times it by the WACC to get the dollar cost of capital. - Total Capitalization is a measure of Total Debt/Total Debt + Equity (there is also a Long Term Debt Capitalization ratio - Total capitalization includes short term debt). Basically capitalization is a measure of the firms ability to take on more debt. Lower = better.

#16

Oops

#17

This is getting IMPOSSIBLE by each passing minute.

#18

canadiananalyst Wrote: ------------------------------------------------------- > Oops haha, u r all the way in Alt Invst my friend.

#19

Haha, also there is a capitalization rate which is part of the Real Estate section. You were right with that. R-G implied through NOI/MV is also known as a capitalization rate.

#20

At this point its all in there somewhere in my brain and I’m not differentiating between topics sorry! I did however see an option related (bsm model) in with fsa intertwined with pensions no joke! Haha so ya it’s good to put it all together at some point until you make a mistake :s