What are the top 100 finance questions (and answers) you were always afraid to ask because somebody might write an equation proving you are a dummy?
Here are a couple:
Q: What is Net Income?
A: The last line on the Profit and Loss Account
Q: If dividends are real money is net income real money?
A: No net income is not real money
Ok who is the wise guy? It’s Pablo Fernandez, Harvard PHD and Professor of Finance at IESE School of Finance in Madrid Spain. I have had a couple of communications from him informing me of his papers. Now, I realize we aren’t all doing business in Spain but one such paper has some global appeal. 100 questions on finance, is a collection from his students and has many questions helpful to the layman. This differs from his other papers which focus on valuation techniques and are often quite technical. I would not doubt for a second that Pablo knows his stuff in finance. However, in the real world sometimes more technical is less useful and if a concept needs an equation its Stephen Hawking territory and doesn’t belong on my blog. But Mr. Fernandez does not use equations(well, not too much) in the Q&A which is why he gets air time. This paper answers lots of finance questions with high finance answers yet some of them even goofy enough to make me feel smart. You will have to sift out some of the technical answers and academic tangents but that’s okay the paper is fundamental enough as to be interesting to us budding tycoons.
Its a good read and it readily accessible PDF format so enjoy.
Here’s a couple more:
Q: The cash flow (net income plus depreciation) is a flow of cash to the shareholders or to the company?
A: To call net income plus depreciation cash flow is an enormous mistake.
Now here is one I didn’t know.
Q: Is net income …. a number whose significance is quite doubtful?
A: It might be convenient to remember this maxim – Net Income is an opinion while cash flow is a fact.
If you are really brave and/or want to increase your IQ here are some of his other papers which can also be found in the Resource section
100 Questions on Finance
http://ssrn.com/abstract=1117917
A More Realistic Valuation: APV and WACC with Constant Book Leverage Ratio
http://ssrn.com/abstract=946090
A Definition of Shareholder Value Creation
http://ssrn.com/abstract=268129
EVA and Cash Value Added Do Not Measure Shareholder Value Creation
http://ssrn.com/abstract=270799
Shareholder Value Creation of Microsoft and GE
http://ssrn.com/abstract=559419
