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 involves a quantitative approach to evaluating a company’s financial standing and the market value of its stock. This assessment relies on audited financial reports, which are mandatory for public companies to publish annually as part of regulatory obligations. Financial analysts employ this method to gauge portfolio performance and provide investment recommendations. Students in university business programs also leverage corporate financial analysis to generate case studies for classroom discussions. The examination of a corporation’s financial position encompasses factors such as profitability, liquidity, and valuation, utilizing key financial statements like the balance sheet, income statement, cash flow statement, and statement of owner’s equity. In the context of managing a company’s financial health, services like corporate payroll services play a crucial role in ensuring smooth operations.
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 and financial investments with cryptocurrency next to Bitcode Method to start monetizing and capitalizing.
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…]
Optimal Capital Structure with Business Disruption Costs
In an earlier post we showed that, for a tax-paying firm, WACC is always a declining function of leverage. If firm value is an inverse function of WACC, this suggests funding operations with 100% debt.
In fact we observe that firm value is concave in leverage and appears to peak when there is some equity in the capital structure. We’re forced to conclude that firm value isn’t solely a function of WACC, but instead varies in a more complicated fashion with leverage. In this post we’ll review one theory that explains this, and which can guide us in divining an “optimal” capital structure. [Read more…]
Use Distance-Based Peer Analysis
In an earlier post we saw how peer analysis can mislead. In this post we suggest a better method: distance-based peer analysis. [Read more…]
How To Mislead with Peer Analysis
Peer analysis can provide a cross check for the recommendations we derive from more normative analysis. The best peer analyses begin with a narrowly defined population of comparable firms. If the proper care isn’t given to this selection process, the results can prove misleading, as we’ll see in the following example.
Share Repurchase Myths
There’s a surprising amount of misleading writing about capital distribution, and in particular the issue of dividend vs. share repurchase. In this post we’ll examine some common canards. [Read more…]
The Economic Irrelevance of Distribution Form
A recent article in the Economist suggests that managers with exposure to their firm’s share price would benefit by reducing dividends and instead buying back shares. From a strictly economic point of view, we don’t see the difference. [Read more…]
The End of Dividends
Once the dominant form of capital return, regular dividends have been in secular decline since the early 1980s. In this post we consider why. [Read more…]
A Process for Quantitative Analysis
Though quantitative analysis is interesting in its own right, we expect its practice to become more widespread if we can make money doing it. In this post we identify some choices to be made when designing a process for quantitative analysis.
Picking up Nickels
Sustainable strategies for driving revenue include picking up nickels and bagging elephants. The former tack assumes high volumes and admits the following characteristics: [Read more…]
Consider Behavioral Finance
Behavioral finance is a great field, no doubt, and deserved its 2002 Nobel prize. The difficulty for practitioners is to turn its irrefutable findings into actionable recommendations. In this post we highlight a few of the challenges. [Read more…]
Mislead with Regression Analysis
There are lies, damn lies, statistics, and regression analyses. In this post we’ll examine some of the abuses of the last style.
Our search for understanding corporate finance leads us to drink from many questionable springs. Statistical analysis can help or hinder during the journey. A good rule of thumb is All regression analyses are wrong, but some are useful.
Our example analysis seeks to discover whether paying a dividend increases firm value. [Read more…]