(Post 38/week 29)Tip for thought:khan academy investment lesson 1 short summary

1)How long does it take to double your money?

• Use the rule of 72 to calculate
• For example, if the percentage is 10% annually, you will take 72/10=7.2 yr to double your money

2)Calculating simple interest

P=principles amount
I=interest
T=time

1. After 1 year, which means t is 1
2. Amount to pay after 1 years=p+p
3. So assuming the principal amt is 50dollar and the interest is 15%
4. After 20 years
5. 100%=50
6. 15%=7.5
7. 20*15=150
8. The total is 150+50=200

3)Calculating compound interest

P=principle amount
I=interest
T=time
N=number of time that will be compound in that year

Formula for calculating compound interest:P((1+(r%/n))^(n*t) simplified to p(E^r%t)

1. E.g principle of an amount is $50
2. Time: Have to pay for 3 years
3. N=number of time that will be compound is 4
4. I=interest is 10% compound annually
5. 50((1+(0.10/4))^(3*4)
6. =67.49

4)

• A debtor=the person that borrow the money
• A creditor=the person that is owed

5)

• Asset=an asset is something that will give you economic benefits in the future
• Cash is An asset because it allows you to buy things in the future
• Liability: a liability is an economic obligation to someone
• Asset=liability+equity
• Equity: just what you own
• Let say I want to buy a house that is $250000, I have no debt to be pay hence my liability is $0 and my equity is $250000
• Collateral= something you own to a bank in exchange to get money from them
• Marking to market=this mean that every few months or so, I will look at the asset and review it's net worth price currently(because asset like stock will fluctuate)
• Leverage=leverage is when you use debt to buy an asset

6)

• Security=is essentially something that can be bought and sold and has economic value
• Security in the equity world is stock
• Security in the debt world is bond
• E.g if they are giving a 6 % coupon bond this just means that they are going to give me 3% of my bond twice in the year

7)To calculate how much your money is worth now,e.g take the amt/inflation

1. 2% inflation=1.02
2. Amt=$110
3. 110/1.02=$107.8

8)Scenario example for understanding

• I own a cupcake factory
• It is able to produce a million cupcake per year, and I sold 1 million cupcakes at $2 each
• Hence, my revenue will be 2 million per year
• Cogs=cost of goods(or rather cost to produce cupcake)
• 1million cupcake=$1 million
• 2million-1million=1million, this is known as gross profit
• Overhead expenses=advertisements, exporting of the cupcake, e.g overhead expenses is 500thousand
• Operating profit=gross profit-overhead expenses=500thousands

9)Bond: You lend a company some money

How much a share is worth?
To know how much a share is worth, take the equity of the company divided by the no of share
E.g the equity of the company is 20million and the no of share is 2million, We take 20million/2million=10dollars, So if the share price is below 10 dollars we buy and if its above 10 dollars, we do not buy.

• Price of share=stockholder equity/no of share
• Last action-how much was this share bought or sold for
• Bid-how much someone is willing to pay for the share
• Ask-how much someone is willing to sell the share
• 52wk range-the range of the share price in 52 Wks
• Average vol-this is the number of shares sold per day
• Market cap-how much the market think that this company is worth
• To calculate the market cap, take the last action price x the no of share

10)Dilution of share

E.g a company has 4 shares, each of the share is worth $2, hence company total assets is now $8 to raise money the company can divide the share more e.g to 6 share,the share price are still the same at $2 just that the percentage of the company you own has changed(which is not important) and the company now has an asset of $12

11)The merger of the company = the share price will rise

12)Basic leverage buyout example
Let say your business is worth 1 million and earn 1.5million each year and you have to pay 1/3 of  taxes each year and then I say I would buy your company for 10 million, to you it is a very good deal as it is ten time of what your company is worth

But however, I only have one million so how do I raise the remaining 9 million to buy your company?

I go to the bank and say, hey I would like to borrow 9 million from you and I am going to put the business as a collateral and you can charge me at 10% per year

So before that, I have a pre-tax income of 1.5million after minus the 900k(which is the interest of 9 million), this means I have a pre-tax income of 600k

The cool thing is that corporate interest is tax deductible so paying 1/3 of 600k is 200k which leave me with 400k, pretty good eh?

13)A private company is one who shares are not traded on a public exchange

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