18 Topics Badly Explained by Many Finance Professors

Abstract

This paper addresses 18 finance topics that are badly explained by many Finance Professors. The topics are:

1. Where does the WACC equation come from?
2. The WACC is not a cost.
3. The WACC equation when the value of debt is not equal to its nominal value.
4. The term equity premium is used to designate four different concepts.
5. Textbooks differ a lot on their recommendations regarding the equity premium
6. Which Equity Premium do professors, analysts and practitioners use?
7. Calculated (historical) betas change dramatically from one day to the next.
8. Why do many professors still use calculated (historical) betas in class?
9. EVA does not measure Shareholder value creation.
10. The relationship between the WACC and the value of the tax shields (VTS).
11. Beta and CAPM do not explain anything about expected or required returns.
12. Difference between the expected and the required rates of return.
13. It has been very easy to beat the S&P500 in 2000-2018.
14. Apply the logic principle “Never buy a hair growth lotion from a man with no hair” to your investment advisors… and to your professors.
15. Rational investing in equities.
16. Volatility is a bad measure of risk.
17. About the unhelpfulness of the Sharpe ratio.
18. Common errors in portfolio management and wrong advices.

Keywords: WACC, Expected and the Required Rates of Return, Sharpe Ratio, CAPM

JEL Classification: G12, G31, M21