A paper titled “Best Practice for Cost-of-Capital Estimates” (Levi and Welch, 2017) focuses on implementation recommendations for CAPM-based cost of capital estimates. The authors’ focus isn’t on finding the “right” cost of capital (which many take to be the expected return for the asset), rather they focus on methodological choices that produce the most stable values over time: namely, creating CoC estimates that best predict next period’s CoC.
[Read more…]CAPM, Risk, and Return: Why the Relationship Is Broken
In an earlier post we illustrated the fundamental breakdown of the risk-vs-return relationship as proposed by CAPM: when test empirically, we find surprisingly that higher-risk stocks enjoy lower returns. In this post we’ll review the suggested rationales. [Read more…]
“The Value of Cash” Published in CFO.com
Building on the research summarized in an earlier post “The Value of Surplus Cash“, we assembled the results into a simple and easily understood framework; the result is published in CFO.com: “The Value of Cash“.
We hope you find the article interesting and useful reading.
The Value of Surplus Cash
Optimizing financing policy includes deciding how much liquidity a company should carry. In this post we find the value of an extra dollar of cash on the balance sheet.
Corporate Finance Analysis: 10 Deadly Sins
We’re all guilty of these, at different times and in different ways. The cause is usually laziness rather than malice; either way, eternal vigilance is the best antidote.
Corporate financial analysis is a quantitative method of evaluating a company’s financial position and the market value of its stock. It is based on the audited financial reports that every public company is required to publish annually to comply with regulatory obligations. Financial analysts use this method to assess the performance of portfolios and to make investment recommendations. Students in university business programs also use corporate financial analysis to produce case studies for discussion in the classroom. Analysis of a corporation’s financial position is concerned with profitability, liquidity, and valuation. It uses the corporation’s financial statements to evaluate the company, including the balance sheet, income statement, cash flow statement, and statement of owners equity. For financial business options read about PPC (pay-per-click) for lawyers is a digital marketing model that allows lawyers to display their ads on Google (or other search engines), contact a PPC for Solicitors and information. You get a premium placement at the top of Google, but in exchange, you have to bid on your target keywords and pay whenever someone clicks your ad. There are various ways to reach conclusions about a company, but certain quantitative methods and standard computations are considered core elements of this type of work. Anyone who wants to function as a professional investment advisor needs to be conversant in at least five areas of financial review.
Convertible Bond WACC
Though we’re not fans of the CAPM definition of risk, the framework is widely known and serves as a useful reference point for discussing some very common questions. In this post we’ll look at the cost of capital for a convertible bond from a number of perspectives, including intuitive/qualitative (which provides quick directional answers) and a more precise numerical calculation.
CAPM Is More Broken Than We Thought
Do you remember that feeling you got when you heard there wasn’t a Santa Claus? How about when you learned that CAPM is broken?
Share Repurchase and a Heterogeneous Investor Base
In a recent post, Felix Salmon suggests that Dell has done a disservice to its equity investors:
A buy-and-hold shareholder in Dell is looking particularly idiotic right now. If you bought 15 years ago at $10.84, you should expect to have at least $15.40 in value at this point: after all: that’s how much the company has made since then. Instead, you have less than you started with. And all the extra money went to fickle shareholders who sold their stock back to the company.
Would Dell’s shareholders have been better off with a dividend? Let’s investigate.. [Read more…]
Adjust Valuation Multiple for Growth
If one equity is valued at 15x P/E, and another at 10x P/E, is the latter a bargain? To answer this question we should adjust for growth.
Adjusting a valuation multiple (such as P/E or EV/EBITDA) is frequently done by dividing by growth — such as with the common P/E/G multiple.
We can do better… [Read more…]
Share Repurchase Literature Survey
This post is a quick survey of recent literature regarding share repurchases. We look at who repurchases shares, why they do it, and whether repurchase activity affects the price or liquidity of equities.