Interviewer:  So, here we are in the second Interview learning about an interface between an investment opportunity and the investment opportunity owner and how the interface conveys this thing called Internal Equity Return.

Author:  A recent discovery calculates the multiple-period equity return named Internal Equity Return.

Interviewer:  Whoa! Let me stop you right there. Doesn’t everyone just ignore Return on Equity as an investment opportunity measure?

Author:  Return on Equity is only ignored as a single period snapshot because of its limited scope. The idea of a multiple-period equity return is new.

Interviewer:  Where in blue-blazes would I find a multiple-period Internal Equity Return?

Author:  Do you ever notice an answered investment opportunity being turned into Financial Statements?

Interviewer:  Sure. I see investment opportunity cash flows and EBITDA all the time. Isn’t EBITDA from an Income Statement?

Author:  Yes but, I’m talking about more than an investment’s cash flow or just an Income Statement. I’m talking about turning an investment opportunity into all four interrelated Financial Statements: Balance Sheet, Income Statement, Changes in Cash Flow and Owner’s Equity.

Interviewer:  Oh, I see – all four. No, I never see an investment opportunity turned into all four Financial Statements, I just see cash flow and EBITDA investment opportunities. All four Financial Statements seems like overkill. Wouldn’t anything beyond cash flow or EBITDA be just a waste of time? Why doesn’t just cash flow and EBITDA suffice? That’s all I ever see.

Author:  Cash flow, EBITDA or an Income Statement alone represents only an asset’s operating performance, not an investment opportunity’s full investment picture. All four Financial Statements bring out an investment opportunity’s full investment picture and make confirming Internal Equity Return calculations possible.

Interviewer:  Tell me why an investment opportunity demonstrating Internal Equity Return is so important.

Author:  Without it, you don’t know if the solved investment opportunity answer is going to generate the return it is supposedly designed to generate. You need the investment opportunity’s Internal Equity Return goal proven out in an achievable structure like Financial Statements to feel comfortable you’re making the best investment decision possible.

Interviewer:  How is this being accomplished today?

Author:  It’s not.

Interviewer:  So, are you are telling me today, no one can generate a multiple-period ROE from an answered investment opportunity?

Author:  Correct. I’m telling you today no one can generate an investment opportunity’s Internal Equity Return.

Interviewer:  Wait a minute, every investment opportunity has either equity return as an item to be solved or as a given assumption and you’re telling me no one can prove it out or demonstrate it in any form?

Author:  Yes.

Interviewer:  And you can?

Author:  Yes, I can prove out an investment opportunity’s multiple-period equity return named Internal Equity Return with Financial Statements.

Interviewer:  How are you so sure no one else can calculate an investment’s Internal Equity Return”?

Author:  I know no else can calculate Internal Equity Return because I’ve been looking for it for forty-years and not found it. If a methodology exists to portray an answered investment opportunity’s equity return, traditional IRR and NPV techniques, as we know them today, would cease to exist. They would have been quickly replaced as inferior. Trial and error IRR hurdle rates would be vanquished and replaced with expected equity return. I’ve not seen any replacement of these eighty-year plus year old tools. Furthermore, our institutions of high learning still put forth IRR, NPV and hurdle rate techniques as the dominant investment evaluation tools.

Interviewer:  Wow. This sounds pretty intense if your telling me you’ve found a way to replace IRR, NPV and hurdle rates.

Author:  Yes, it’s important. In the first Interview we established the Solve/Assumption Synchronicity (SAS) investment benchmark and in this second Interview we are specifying an interface to convey Internal Equity Return the benchmark enables.

Interviewer:  Slow down a bit! You said your recent work could exhibit an answered investment opportunity’s Internal Equity Return. Explain this. What exactly is Internal Equity Return?

Author:  Internal Equity Return (IER) is similar in nature to the single period Return on Equity (ROE) except IER encompasses an entire range over all investment opportunity periods, not just a single period.

Interviewer:  Ok - keep going.

Author:  IER and ROE each contain two numbers. First is, “What you get”, secondly is, “for what you have invested”.

Interviewer:  So, it’s, “What you get for what you have invested”, just two numbers. Sounds a little simplistic. OK, I’ll bite. Where do IER’s two numbers come from?

Author:  A discovery found them in an Owner’s Equity Statement, the fourth of four basic Financial Statements. The first three Financial Statements are concisely summarized in the fourth, Owner’s Equity Statement.

Interviewer:  So, you’re using Owner’s Equity Statements to represent summaries of investment opportunities?

Author:  Yes, that’s right. See Schedule 2’s two Owner’s Equity Statements, Lines [1] through [4] and Lines [10] through [13]. These two special Owner’s Equity Statements are called finite Owner’s Equity Statements. A finite Owner’s Equity Statement starts and ends in zero, like an investment opportunity. Owner’s Equity Statements represent an unencumbered conduit between an investment opportunity and the investment opportunity’s owner.

Interviewer:  An unencumbered finite what?

Author:  Owner’s Equity Statement.

Interviewer:  Ok, I’m looking at Schedule 2’s two Owner’s Equity Statements. So now what?

Author:  What do you notice about Lines [9] and [18]?

Interviewer:  Let me look. They’re zero?

Author:  What zero difference does line [9] and [18] portray?

Interviewer:  Well, Lines [5] and [14] seem to be an IRR calculations and I’m not sure but, Lines [8] and [17] seems to be your IER calculation – a Net Income NPV divided by an Equity Outstanding NPV.

Author:  Yes, that’s correct.

Interviewer:  So, what are you saying, IRR equals ROE, I mean IER? And this supposedly works because all the net incomes and all the equity outstanding are net present valued back at the cash IRR rate, which equals IER?

Author:  Yes, exactly. An investment opportunity’s equity only IRR always equals IER within finite Owner’s Equity Statements. Finite Owner’s Equity Statements excel as investment opportunity focal points.

Interviewer:  This is astonishingly impressive. I have never seen in my life any textbooks or experiences even attempt to imply IRR equals ROE, I mean IER. You’ve provided a simple, straightforward and definitive proof that IRR equals IER, all within a widely familiar Owner’s Equity Statement format. No new material to grasp here, just a new way of looking at things. This is amazing! IRR equals IER.

Author:  Yes, it’s important.

Interviewer:  Since IRR and IER are equal, why are you defining IER as a new multi-period equity return measure instead of keeping it simple by sticking with the established IRR?

Author:  Unlike IRR, IER’s numerator can be used to put investment evaluations in a new perspective.

Interviewer:  What kind of new perspective?

Author:  The perspective of allowing a business professional to know an investment opportunity’s net income net present value.

Interviewer:  Why is that important? All I need to know is the percent return.

Author:  Maybe not. Maybe you think that because that’s all you’ve ever known. Maybe there’s more than just a single percent return number for an investment opportunity to consider during an evaluation.

Interviewer:  Like what? By the way, my head is starting to hurt again.

Author:  Solve/Assumption Synchronicity’s reciprocal nature affords the ability to use Internal Equity Return exclusively as a given assumption when initially evaluating investment opportunities, not to be used initially as a solved investment outcome. Solve/Assumption Synchronicity creates a balanced holistic investment opportunity. In a balanced holistic investment opportunity, Internal Equity Return’s role is to represent risk commensurate with the investment opportunity, not represent Internal Equity Return as a solved outcome.

Interviewer:  Wow. You are really out there with this fuzzy stuff. This seems like a lot of work. My head is pounding. What are you trying to say?

Author:  Initially, Solve/Assumption Synchronicity affords investment opportunities to solve for something other than Internal Equity Return. Internal Equity Return should start out in an investment opportunity as a given assumption. Internal Equity Return should initially represent an investment opportunity’s risk profile addressing the overall risk of the investment opportunity. To begin an investment opportunity, one should solve for the investment category with the greatest amount of risk. The investment category to solve should be either Initial Cost, Operating Performance or Salvage Sale Price, not IER. There is an investment adage, which says to “investment in what you know”. To begin an investment opportunity, if the investment category with the greatest unknown is IER, you’ve broken the “invest in what you know” adage.

Interviewer:  If you’re saying not to consider IER or IRR as an evaluated item in an investment opportunity, then what am I going to use to evaluate the investment opportunity?

Author:  Going back to IER’s numerator of “What you get” is Net Income Net Present Value (NINPV). Schedule 2, Exhibit 2, Line [15]’s $64 Net Income Net Present Value is $2 greater than Exhibit 1, Line [6]’s $62. Exhibit 2 is slightly more attractive than Exhibit 1.

Interviewer:  But I like Exhibit 1’s 40% equity return more than Exhibit 2’s 30%. Why can’t I want to earn 40%?

Author:  Exhibit 1’s 40% equity return is not directly comparable to Exhibit 2’s 30%. The 40% and 30% are two separate risk assumptions. The two equity return numbers are assumptions used to mitigate risk within their respective investment opportunities. Exhibit 1 is riskier than Exhibit 2. The greater the risk the less NINPV is attributable to an investment opportunity.

The numbers to compare are Exhibit 1’s $62 and Exhibit 2’s $64 NINPV. There is an equal probability of achieving Exhibit 1’s $62 or Exhibit 2’s $64 NINPV.

Interviewer:  This is so confusing. Quantifying an investment opportunity’s risk is a lot of work and I’m not fully sure how to do it. Let’s move on. Is there anything else I should take away from all of this?

Author:  Ok. Yes, there are continuing underlying themes of unification with the traditional tools.

Interviewer:  Yes, I see where IRR equaling IER is another unification step. The first interview’s traditional IRR, NPV, PMT and FV tool unification is also significant but, what else is there?

Author:  What is not apparent are how historical differing views between accounting and finance camps have been unified. For evaluation purposes the accounting camp liked accrual income and the finance camp liked cash. Both camps purport their stance superior to the other one’s position because the other’s stance is prone to manipulation. Both parties were steadfast and neither camp could get beyond this initial difference.

Interviewer:  Ok. This is getting a little bit esoteric for me. Where are you headed with this further unifying stuff?

Author:  Accrual net income NPV divided by equity outstanding NPV yields IER and IER equals cash-based IRR. By unifying IER and IRR, we were also unifying accrual and cash approaches to evaluating investment opportunities. In the proper context, either cash or accrual basis investment opportunities can be equally utilized to evaluate investment opportunities.

Interviewer:  The accrual/cash thing is still kind of esoteric and only mildly interesting to me.

Author:  As we go along replacing traditional IRR and NPV we want to make sure we’ve found the best possible methodology to do so. The best way to replace IRR and NPV is to not only establish an investment evaluation benchmark centered around unifying the traditional tools and demonstrating Internal Equity Return but also look to resolve and unify other outstanding areas as well.

Interviewer:  If you say so.

Author:  Yes, it’s important to get this right. Let’s take a break and then start another interview.

Interviewer:  You mean there’s more?

Author:  Yes, all very important. In the third interview we’ll explore a structure to transform an answered investment opportunity into fully complemented affirming Financial Statements, including an Owner’s Equity Statement. In the fourth Interview we learn how to answer investment opportunities in a way that achieves the SAS benchmark?

Interviewer:  You mean two more interviews? This seems all backwards. You’ve got the good stuff in the fourth interview.

Author:  Since the traditional investment technique shortcomings are not very well recognized, I first want to fully define the issues, then later show how the new investment methodology solves those issues.

Interviewer:  Still seems backwards.

Author:  Do you still want to fully learn why the world needs to re-learn microeconomic investment decision-making techniques?

Interviewer:  Yes, I do but, I didn’t know it was going to be this much work.

Author:  Transforming an investment paradigm can be an uphill journey.

Second Interview summary: In the second interview we learned how a finite Owner’s Equity Statement could calculate a multiple-period equity return measure named Internal Equity Return (IER). We learned an equity only IRR equals the multiple period IER. We learned IER is superior to traditional IRR and NPV – traditional IRR and NPV cannot depict an investment opportunity’s IER.