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.
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.
What Does a Share Buyback .. Buy?
Answer: nothing.
If you invest in a private equity fund, the general partner is tasked with investing your funds. If she can’t find anything to buy, she returns the unused capital, shrinking the fund. This is the economic equivalent of a share buyback. Distributions of this sort don’t buy anything.
But the word buy in share buyback can be confusing. [Read more…]