The Daily Technical #79: How do you determine the risk-free rate?

Good morning. Welcome to the 79th edition of The Daily Technical.

We’re hiring an M&A Research Intern to write deep dives on recent transactions and industry trends for a new initiative we’re working on with HeadStart Careers called the Wall Street Accelerator.

This is an unpaid position that will take up a few hours each week. In exchange, you will get free access to HirePrep and the Wall Street Accelerator community once it launches in February.

If you’re interested, fill out an application here and we’ll be in touch!

Without further ado, let’s dive in.

First time reading? Sign up here.

OVERVIEW OF YESTERDAY’S QUESTION
What is the difference between a write-down and a write-off?

When distinguishing between a write-down and a write-off, focus on the asset's remaining value.

A write-down occurs when an asset's fair market value drops below its book value due to impairment, yet retains some value on the balance sheet. Based on the write-down amount deemed appropriate, the value of the asset is decreased to reflect its true value on the balance sheet. Examples of asset write-downs would include damages caused by minor fires, accidents, or sudden value deterioration from lower demand.

Conversely, a write-off signifies an asset's entire loss of value, reducing its worth to zero. This means the asset is considered worthless and is removed from the balance sheet, as seen in cases of uncollectible accounts or stolen inventory.

Common Mistakes

1. Mixing up 'write-down' and 'write-off.' Remember, a write-down reduces the asset’s value but not to zero, while a write-off means the asset's value is completely eliminated.

2. Missing the balance sheet effect. Highlight how a write-down alters the asset’s book value without removing it entirely, whereas a write-off removes the asset and impacts net income.

3. Only reciting definitions without showing understanding. Illustrate the practical implications of each adjustment on financial statements to show depth beyond a mere definition.

TL;DR

• Write-Down: Asset's fair market value falls below book value but retains some value. Adjusts to reflect real value. Examples: minor fire damage, decreased demand.

• Write-Off: Asset value reduced to zero. Considered worthless, removed from balance sheet. Examples: uncollectible receivables, stolen inventory.

• Key Distinction: Write-down retains some asset value; write-off eliminates all value.

TODAY’S QUESTION
How do you determine the risk-free rate?

Type your answer here. Within 60 seconds you’ll have custom feedback in your inbox.

THAT’S A WRAP
See you Monday,

Mike Lukasevicz
Founder @ HirePrep