A superior new replacement to traditional discounted cash flow valuation models
In the aftermath of the financial meltdown, the models commonly used for discounted cash flow valuation have become outdated, practically overnight. To meet the demand for an authoritative guidebook to the new economy, internationally recognized expert Kenneth Hackel has written Security Valuation and Risk Analysis.
Mercer Capital | How to Value Your Insurance Brokerage (2018)Mercer Capital
Understanding how insurance agencies and brokerages are actually valued may help you understand how to grow the value of your business and maximize your return when it comes time to sell. The purpose of this whitepaper is to provide an informative overview regarding the valuation of insurance brokerages and agencies.
Managing distressed private equity and credit investmentsSteven Rosenblum
Many family offices, pensions, endowments and other investors that have historically allocated capital to private equity and credit funds (“Investors”) are increasingly investing in transactions directly. To achieve similar returns, Investors must replicate the capabilities of institutional asset managers in sourcing opportunities, structuring transactions and investment oversight. When unexpected problems occur post-investment, Investors often lack the resources and internal expertise to optimally manage the position, especially in distressed situations. These include risk management practices to help prevent investments from becoming distressed, activist expertise to manage distressed situations and strategies to recover investments after they have become impaired. This article discusses best practices in each of these areas that help Investors maximize the value of problematic investments.
Fairness Considerations in Going Private TransactionsMercer Capital
A presentation by Jeff K. Davis, CFA, that provides an overview of issues surrounding a decision to take an SEC-registrant private.
Pros and Cons of Going Private
Structuring a Transaction
Valuation Analysis
Fairness Considerations
Fairness Considerations in Going Private TransactionsJeff Davis
While there once may have been a good reason to be a public company (or not), that may no longer be the case: hence, consideration of a go-private transaction may be warranted. This short presentation is intended to provide an overview of some issues surrounding a decision to take an SEC-registrant private. This presentation does not cover all issues with going private transactions; nor should it be construed to convey legal, accounting or tax-related advice. Companies considering such a move should hire appropriate legal and financial advisors.
Can Traditional Active Management Be Saved?Clare Levy
Active managers need to start incorporating the lessons of behavioural science if they have a chance of reversing the flow of assets into passive investment vehicles. Eric Rovick highlights some of the areas of cognitive risk evident in active investment management and provides a managerial and operational framework for addressing them.
4 active vs passive advisor insert funds flows dfa (advisor present) p. 1-3, ...Weydert Wealth Management
This excellent article contains three key graphics illustrating how average investors flow into and out of investments at the wrong times and contrasts this with the average DFA investor who remains much more consistent and disciplined.
Mercer Capital | How to Value Your Insurance Brokerage (2018)Mercer Capital
Understanding how insurance agencies and brokerages are actually valued may help you understand how to grow the value of your business and maximize your return when it comes time to sell. The purpose of this whitepaper is to provide an informative overview regarding the valuation of insurance brokerages and agencies.
Managing distressed private equity and credit investmentsSteven Rosenblum
Many family offices, pensions, endowments and other investors that have historically allocated capital to private equity and credit funds (“Investors”) are increasingly investing in transactions directly. To achieve similar returns, Investors must replicate the capabilities of institutional asset managers in sourcing opportunities, structuring transactions and investment oversight. When unexpected problems occur post-investment, Investors often lack the resources and internal expertise to optimally manage the position, especially in distressed situations. These include risk management practices to help prevent investments from becoming distressed, activist expertise to manage distressed situations and strategies to recover investments after they have become impaired. This article discusses best practices in each of these areas that help Investors maximize the value of problematic investments.
Fairness Considerations in Going Private TransactionsMercer Capital
A presentation by Jeff K. Davis, CFA, that provides an overview of issues surrounding a decision to take an SEC-registrant private.
Pros and Cons of Going Private
Structuring a Transaction
Valuation Analysis
Fairness Considerations
Fairness Considerations in Going Private TransactionsJeff Davis
While there once may have been a good reason to be a public company (or not), that may no longer be the case: hence, consideration of a go-private transaction may be warranted. This short presentation is intended to provide an overview of some issues surrounding a decision to take an SEC-registrant private. This presentation does not cover all issues with going private transactions; nor should it be construed to convey legal, accounting or tax-related advice. Companies considering such a move should hire appropriate legal and financial advisors.
Can Traditional Active Management Be Saved?Clare Levy
Active managers need to start incorporating the lessons of behavioural science if they have a chance of reversing the flow of assets into passive investment vehicles. Eric Rovick highlights some of the areas of cognitive risk evident in active investment management and provides a managerial and operational framework for addressing them.
4 active vs passive advisor insert funds flows dfa (advisor present) p. 1-3, ...Weydert Wealth Management
This excellent article contains three key graphics illustrating how average investors flow into and out of investments at the wrong times and contrasts this with the average DFA investor who remains much more consistent and disciplined.
Entrepreneurs and investors must both understand the critical aspects of valuation for pre-revenue
and startup entrepreneurial ventures. By aligning expectations, such understanding fosters positive,
productive relationships between funders and founders. In addition, investors and entrepreneurs
benefit separately when they know the answers to essential questions. What are the most important
factors angel investors should consider in determining a company’s value? How can entrepreneurs
better present their companies to attract early-stage investors and build effective relationships?
“Investment Valuations of Seed- (Startup) and Early-Stage Ventures” by Luis Villalobos, founder of Tech
Coast Angels, defines perspectives from which investors and entrepreneurs view valuation and provides
insights that can reduce the natural contentiousness of negotiating valuation.
Understanding the value of an investment management business requires some appreciation for what is simple and what is complex. On one level, a business with almost no balance sheet, a recurring revenue stream, and an expense base that mainly consists of personnel costs could not be more straightforward. At the same time, investment management firms exist in a narrow space between client allocations and the capital markets, and depend on revenue streams that rarely carry contractual obligations and valuable staff members who often are not subject to employment agreements. In essence, RIAs may be both highly profitable and prospectively ephemeral. Balancing the particular risks and opportunities of a given investment management firm is fundamental to developing a valuation.
Mercer Capital's Tennessee Family Law | Volume 2, No. 3, 2019 | Valuation & F...Mercer Capital
Mercer Capital is the largest valuation and financial advisory firm in Tennessee with offices in Nashville and Memphis. Complex financial issues are a critical part of many of your client engagements. The focus of this newsletter is to provide useful content about these financial issues from the perspective of financial experts. We seek to help you assist your clients in financial and accounting matters.
Bob Pearson • Transamerica Financial Advisors Inc.
- Experts need experts: 10 questions to ask third-party money managers by Kellye Whitney
- Do record margins pose market threat?
- “Rule of 240” compounding by Ron Rowland
- Hot-button topics drive seminar attendance (Matthew Gaude, FSC Securities)
John McGonagle • EPI Advisors, LLC
- Understanding the relevance of risk-adjusted returns by Dave Walton
- Strongest jobs gain since 2012 surprises markets
- Building stronger visibility for an advisory firm (Rodger Sprouse, Titan Securities)
HireLabs Perspective: Increasing Vc Returns In Talent Assessment FirmsHireLabs Inc.
The VCs must ask themselves if they have CEOs who are capable of driving companies
as the recession bottoms.
Looking at the current slowdown in non-farm employment and the subsequent rebound strategies, HireLabs can forecast a recovery in the international labor market - lead by the US - sometime around Feb 2010 (Q1 2010).
Very few CEOs of venture-backed companies have experience of riding a company
through a recession successfully.
The questions that investors should ask there CEOs is
whether they are able to monetize on market-indicators as the recovery approaches.
Investors who are looking to capitalize on the recovery should predominantly understand the teams that are running the companies, and assess the teams’ ability to analyze and perform the market indicators....
Real Estate Workshop | Robin Banks | Wealth Mastery | Wealth MigrateWealth Migrate
As the world gets more digitized it brings with it unique opportunities and risks for you and your family. We are passionate about empowering you with the right information so that you can make the right decisions going forward.
From listening to you and your feedback, there is a clear demand for more intensive and thorough workshops (click here to book) so we can really get into the detail. Therefore in Nov we have planned workshops to ensure we can spend real time and you can not only get deep knowledge and understanding, you also have the ability to get involved and make sure that you can take the vital actions which are needed.
We have broken the day into 2 workshops which focus on two different areas: Property & Technology
• 09h00 - 12h00 How to create a Global Real Estate Investment Portfolio Workshop, hosted by Scott Picken
You should attend this session if you want answers to any of the below:
• How can I start investing, creating and preserving wealth through property, from as little as R1000, both locally and internationally?
• How do I invest in international property, whether I have $1k or $5m?
• How can I get citizenship overseas?
• How can I use technology to remove all the hassle, expenses and pain traditionally involved in investing in direct property, both locally and internationally?
• How do I handle taxes, bank accounts and global structures?
• How do I know what country to invest in?
• How do I know what property to invest in?
• How do I find quality partners on the ground to partner with?
• Why should I consider using technology rather than the traditional REITS and what impact it will this have on my actual returns?
• Where do I get the best research and what systems can I use to do institutional grade due diligence on my investments?
• And many more…
• Click here to book
I, along with our team, will be sharing, teaching and engaging all morning to take people on the entire journey and ensure that they are following the strategies of some of the most successful investors in the world. PLEASE BRING YOUR LAPTOPS as we have a gift and each and every person will walk away having started on their journey to creating and owning a global real estate portfolio. It is simpler and safer than you think! Click here to book
Entrepreneurs and investors must both understand the critical aspects of valuation for pre-revenue
and startup entrepreneurial ventures. By aligning expectations, such understanding fosters positive,
productive relationships between funders and founders. In addition, investors and entrepreneurs
benefit separately when they know the answers to essential questions. What are the most important
factors angel investors should consider in determining a company’s value? How can entrepreneurs
better present their companies to attract early-stage investors and build effective relationships?
“Investment Valuations of Seed- (Startup) and Early-Stage Ventures” by Luis Villalobos, founder of Tech
Coast Angels, defines perspectives from which investors and entrepreneurs view valuation and provides
insights that can reduce the natural contentiousness of negotiating valuation.
Understanding the value of an investment management business requires some appreciation for what is simple and what is complex. On one level, a business with almost no balance sheet, a recurring revenue stream, and an expense base that mainly consists of personnel costs could not be more straightforward. At the same time, investment management firms exist in a narrow space between client allocations and the capital markets, and depend on revenue streams that rarely carry contractual obligations and valuable staff members who often are not subject to employment agreements. In essence, RIAs may be both highly profitable and prospectively ephemeral. Balancing the particular risks and opportunities of a given investment management firm is fundamental to developing a valuation.
Mercer Capital's Tennessee Family Law | Volume 2, No. 3, 2019 | Valuation & F...Mercer Capital
Mercer Capital is the largest valuation and financial advisory firm in Tennessee with offices in Nashville and Memphis. Complex financial issues are a critical part of many of your client engagements. The focus of this newsletter is to provide useful content about these financial issues from the perspective of financial experts. We seek to help you assist your clients in financial and accounting matters.
Bob Pearson • Transamerica Financial Advisors Inc.
- Experts need experts: 10 questions to ask third-party money managers by Kellye Whitney
- Do record margins pose market threat?
- “Rule of 240” compounding by Ron Rowland
- Hot-button topics drive seminar attendance (Matthew Gaude, FSC Securities)
John McGonagle • EPI Advisors, LLC
- Understanding the relevance of risk-adjusted returns by Dave Walton
- Strongest jobs gain since 2012 surprises markets
- Building stronger visibility for an advisory firm (Rodger Sprouse, Titan Securities)
HireLabs Perspective: Increasing Vc Returns In Talent Assessment FirmsHireLabs Inc.
The VCs must ask themselves if they have CEOs who are capable of driving companies
as the recession bottoms.
Looking at the current slowdown in non-farm employment and the subsequent rebound strategies, HireLabs can forecast a recovery in the international labor market - lead by the US - sometime around Feb 2010 (Q1 2010).
Very few CEOs of venture-backed companies have experience of riding a company
through a recession successfully.
The questions that investors should ask there CEOs is
whether they are able to monetize on market-indicators as the recovery approaches.
Investors who are looking to capitalize on the recovery should predominantly understand the teams that are running the companies, and assess the teams’ ability to analyze and perform the market indicators....
Real Estate Workshop | Robin Banks | Wealth Mastery | Wealth MigrateWealth Migrate
As the world gets more digitized it brings with it unique opportunities and risks for you and your family. We are passionate about empowering you with the right information so that you can make the right decisions going forward.
From listening to you and your feedback, there is a clear demand for more intensive and thorough workshops (click here to book) so we can really get into the detail. Therefore in Nov we have planned workshops to ensure we can spend real time and you can not only get deep knowledge and understanding, you also have the ability to get involved and make sure that you can take the vital actions which are needed.
We have broken the day into 2 workshops which focus on two different areas: Property & Technology
• 09h00 - 12h00 How to create a Global Real Estate Investment Portfolio Workshop, hosted by Scott Picken
You should attend this session if you want answers to any of the below:
• How can I start investing, creating and preserving wealth through property, from as little as R1000, both locally and internationally?
• How do I invest in international property, whether I have $1k or $5m?
• How can I get citizenship overseas?
• How can I use technology to remove all the hassle, expenses and pain traditionally involved in investing in direct property, both locally and internationally?
• How do I handle taxes, bank accounts and global structures?
• How do I know what country to invest in?
• How do I know what property to invest in?
• How do I find quality partners on the ground to partner with?
• Why should I consider using technology rather than the traditional REITS and what impact it will this have on my actual returns?
• Where do I get the best research and what systems can I use to do institutional grade due diligence on my investments?
• And many more…
• Click here to book
I, along with our team, will be sharing, teaching and engaging all morning to take people on the entire journey and ensure that they are following the strategies of some of the most successful investors in the world. PLEASE BRING YOUR LAPTOPS as we have a gift and each and every person will walk away having started on their journey to creating and owning a global real estate portfolio. It is simpler and safer than you think! Click here to book
TABLA PERIODICA Y CONFIGURACIÓN ELECTRONICAMiriam Gil
En esta presentación tiene informacion referente a la manera como los electrones en el atomo de un elemento se acomodan en orden creciente de energía, también tiene información del surgimiento de la tabla periodica y como los elementos son ubicados en ésta.
The first chapter introduces us to Corporate finance is essential .docxoreo10
The first chapter introduces us to Corporate finance is essential to all managers as it provides all the skills managers need to; Identify corporate strategies and individual projects that add value to the organization and come up with plans for acquiring the funds. The types of business forms are; sole proprietorship, corporation and partnerships. A sole proprietorship form of business possesses different advantages and disadvantages. A partnership maintains roughly similar pros and cons of a sole proprietorship. A corporation is a legal entity that is separate from its owners and managers. Advantages include a smooth transfer of ownership, limited liability, ease of raising capital. The disadvantages include; double taxation, and a high cost of set-up and report filing. The chapter then deals with Objective of the firm, which is to maximize wealth. The final topic is an in-depth look at Financial Securities, which are markets and institutions.
In the second chapter, we are introduced to financial statements, Cash flow and taxes. Financial statements include; the Income statement and the Balance sheet. An income statement is a financial statement that shows a company’s financial performance regarding revenues and expenses, over a particular period, mostly one year. A balance sheet, on the other hand, is a financial statement that states a company’s assets, liabilities and capital at a particular point in time. Under the cash flow, the chapter covers on the Statement of cash flows, indicates how various changes in balance sheet and income statement accounts affect cash and analyses financing, investing and operating activities. A free cash flow shows the cash that an organization is capable of generating after investment to either maintain or expand its database. Under taxes, Corporate and personal taxes are well explained and the scenarios under which they apply.
Chapter Three analyzes Financial Statements. This analysis is broken down into; Ratio Analysis, DuPont equation. The effects of improving ratios, the limitations of ratio analysis and the Qualitative factors. Ratios help in comparison of; one company over time and one company versus other companies. Ratios are used by; Stockholders to estimate future cash flows and risks, lenders to determine their creditworthiness and managers to identify areas of weaknesses and strengths. Liquidity ratios show whether a company can meet its short-term commitments using the resources it has at that particular time. Asset management ratios exemplify how well an organization utilize its assets. Debt management ratios, leverage ratios as well as profitability ratios are explained.
The DuPont equation focuses on several issues. These are; Debt Utilization, Asset utilization and the Expense Control. Consequently, Ratio analysis has various problems and limitations. These include; Distortion of ratios from seasonal factors, various operating and accounting practices can distort comparisons and also it i ...
Mercer Capital | Valuation Insight | Capital Structure in 30 MinutesMercer Capital
Capital structure decisions have long-term consequences for shareholders. Directors evaluate capital structure with an eye toward identifying the financing mix that minimizes the weighted average cost of capital. This decision is complicated by the iterative nature of capital costs: the financing mix influences the cost of the different financing sources. While the nominal cost of debt is always less than the nominal cost of equity, the relevant consideration for directors is the marginal cost of debt and equity, which measures the impact of a given financing decision on the overall cost of capital. The purpose of this whitepaper is to equip directors and shareholders to contribute to capital structure decisions that promote the financial health and sustainability of the company.
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66 harvard business review | hbr.org
t’s become fashionable to blame the pursuit of
shareholder value for the ills besetting corporate
America: managers and investors obsessed with next
quarter’s results, failure to invest in long-term growth,
and even the accounting scandals that have grabbed head-
lines. When executives destroy the value they are sup-
posed to be creating, they almost always claim that stock
market pressure made them do it.
The reality is that the shareholder value principle has
not failed management; rather, it is management that has
betrayed the principle. In the 1990s, for example, many
companies introduced stock options as a major compo-
nent of executive compensation. The idea was to align the
interests of management with those of shareholders. But
the generous distribution of options largely failed to mo-
tivate value-friendly behavior because their design almost
guaranteed that they would produce the opposite result.
To start with, relatively short vesting periods, combined
with a belief that short-term earnings fuel stock prices, en-
couraged executives to manage earnings, exercise their
options early, and cash out opportunistically. The com-
mon practice of accelerating the vesting date for a CEO’s
Companies profess devotion to shareholder value but rarely follow the practices
that maximize it. What will it take to make your company a level 10 value creator?
by Alfred Rappaport
I
S
IM
O
N
P
E
M
B
E
R
T
O
N
Ways to Create
Shareholder Value
Y
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M
A
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C
Y
A
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B
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A
C
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september 2006 67
Te n Wa y s t o C r e a t e S h a r e h o l d e r Va l u e
options at retirement added yet another incentive to
focus on short-term performance.
Of course, these shortcomings were obscured during
much of that decade, and corporate governance took a
backseat as investors watched stock prices rise at a double-
digit clip. The climate changed dramatically in the new
millennium, however, as accounting scandals and a steep
stock market decline triggered a rash of corporate col-
lapses. The ensuing erosion of public trust prompted a
swift regulatory response–most notably, the 2002 passage
of the Sarbanes-Oxley Act (SOX), which requires compa-
nies to institute elaborate internal controls and makes cor-
porate executives directly accountable for the accuracy of
financial statements. Nonetheless, despite SOX and other
measures, the focus on short-term performance persists.
In their defense, some executives contend that they
have no choice but to adopt a short-term orientation,
given that the average holding period for stocks in profes-
sionally managed funds has dropped from about seven
years in the 1960s to less than one year today. Why con-
sider the interests of long-term shareholders when there
are none? This reasoning is deeply flawed. What matters
is not investor holding periods but rather the market’s val-
uation horizon – the number of years of expec.
Debt and equity are the two important sources of finance for the firms. Basically, capital structure of the firm revolves around the judicious mix of the debt and equity. Upon Debt and equity mix much research has been done and many have designed the capital structure in a very different manner.
Capital structure theory can be said as the manner in which a company or organization finance its economic activities. Basically, capital structure of a firm is the combination of equity and debt. It is a very important decision for every organization or business house. This decision revolves around a question “How to make an optimal capital’s structure for the firm?” and what are the factors that influence the decision. Because the capital structure decision ultimately affects the management, investors and lenders. So, it becomes very crucial for the firms. Earlier many researchers have made investigation on the capital structure determinants but still there are loopholes to be filled up. The theory of Capital Structure began with the phenomenal work made by Modigliani and Miller (1958, 1963). It stirred the academic world to pour more thoughts into that and many interesting works came out.
Capital structure refers to the way a firm chooses to finance its assets and investments through some combination of equity, debt, or internal funds. It is in the best interests of a company to find the optimal ratio of debt to equity to reduce their risk of insolvency, continue to be successful and ultimately remain or to become profitable.
DETERMINANTS OF CAPITAL STRUCTURE:
The capital structure of a concern depends upon a large number of factors such as leverage or trading on equity, growth of the company, nature and size of business, the idea of retaining control, flexibility of capital structure, requirements of investors, cost of floatation of new securities, timing of issue, corporate tax rate and the legal requirements. It is not possible to rank hem because all such factors are of different important and the influence of individual factors of a firm change over a period of time.
1. Financial Leverage or Trading on Equity: Financial leverage is one of the important considerations in planning the capital structure of a company. One common method of examining the impact of leverage is to analyse the relationship between Earnings Per Share (EPS) and EBIT. The companies with high level of leverage can make profitable use of the high degree of leverage to increase return on the shareholders' equity.
2. Growth and Stability of Sales: The capital structure of a firm is highly influenced by the growth and stability of its sales. If the sales of a firm are expected to remain fairly stable, it can raise a higher level of debt. Stability of sales ensures that the firm will not face any difficulty in meeting its fixed commitments of interest payment and repayments of debt. Similarly, the rate of growth in sales also affects the capital structure decision.
3. Cost o
What Family Business Advisors Need to Know About ValuationMercer Capital
Family business advisors help companies and leaders navigate a wide range of business and family challenges, ranging from corporate governance to succession planning to family relationship dynamics and all points in between. This whitepaper helps fill in that gap.
UV Capital is an Investment Bank established in 2011 by a team of experts including Industry Veterans, CFA/MBA, Chartered Accountants; who believe their personal commitment, transparency and integrity to be intrinsic to the value proposition for their clients and customers.
UV Capital provides services in the areas of Project Finance, Fund Raising, Private Equity, Innovative & Structured Products, Syndication, Mergers & Acquisition and Corporate Financial Advisory.
UV Capital has already made successful presence in Infrastructure, Energy, Hospitality, Healthcare, Manufacturing, Pharmaceuticals, Real Estate Telecom, Logistics, FMCG, Shipping, IT and Education Sectors.
Captive Finance Firms in a Challenging EconomyKrueger, Cameron.docxtidwellveronique
Captive Finance Firms in a Challenging Economy
Krueger, Cameron; Byrnes, Steven
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; Williams, Christine. The Journal of Equipment Lease Financing (Online)
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28.1 (Winter 2010): 1C-5C.
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Abstract (summary)
Captive finance companies seem to be in the news more than either banks or independent financeorganizations - and the news has been dramatically negative. Some of the traditional views of captives are highly relevant; however, often they are benchmarked against the wrong index. Comparing common leverage or profitability ratios between a captive and its parent provides negative results in good economic times as well as bad! For instance, average return on assets for a sample of 10 organizations that own captives in a down year - 2008 - was 8.7%. The same measure for finance companies over the past five years has been 1.2%. It is imperative for organizations to work with their parents to develop a common understanding and measurement of the broader strategic value of the captive and to promote that understanding to the larger community of stakeholders. This enhanced system of measures, aligned with the captive's true objectives, is less about performance during any given economic cycle and more about strategic value.
Full Text
In the best of times, strengths and weaknesses of a business model are often overlooked. In the worst of times, as with the recent global recession, weaknesses often come to the forefront. For captive finance companies ("captives") this is the case. Even business models once proven to be effective are being questioned and modified. The changing market landscape is demonstrating a great degree of disparity in the value captives are delivering to their parent organizations.
Historically, parents have measured captive value in ways that promote a stand-alone business division view. Although some of these traditional views of captives are highly relevant, they are often benchmarked against irrelevant indexes. Parents need to pay attention to some key metrics affecting the overall organization; alternative approaches for evaluating success may be appropriate, given the evolution of captives. One of the key aspects of the study Capgemini did for the Foundation is measures of success. This article focuses on traditional measures of success and the relevance of those measures for captives.
EXAMINING MEASURES OF SUCCESS
The past 12 months have provided a deluge of negative news for the financial services industry, and equipment finance providers ha ...
Measure What Matters - New Perspectives on Portfolio SelectionUMT
Stock market investors articulate their goals explicitly or implicitly by following the philosophy and methodology of a market expert that fits their investment objectives and appetite for risk. For example, for value and income stocks they may rely on the research conducted by Wharton finance professor Jeremy Siegel¹ or read up on market pros like War-ren Buffet. Much like the stock market investor, companies investing in change face similar challenges when considering where to allocate budget and resources to meet financial and strategic objectives.
Similar to Security Valuation and Risk Analysis (20)
Learn How to Gain Insights and Perspective from Think to Win co-author Peter ...McGraw-Hill Professional
Peter Klein, co-author of Think to Win, and founder of the growth-management consultancy PK Associates, presents Insights--Perspectives. This PPT discusses how to draw strategic conclusions for Consumer Insights.
McGraw-Hill Professional Business Insider Work Smarter Webinar Series presents Leading with Data: Boost Your ROI with Open and Big Data.
Joel Gurin and Prasanna Tambe discuss 2 hot new topics - open data and big data! You will learn how you can use them to gain the competitive edge in creating and developing a business and building an effective workforce.
For the webinar recording visit: http://bit.ly/mhpworksmarter
McGraw-Hill Professional Business Insider Work Smarter Webinar Series presents Leverage Content Marketing and Social Media to Engage More Customers
Take your marketing and your business to the next level with actual tactics and strategies leveraging content marketing programs from Joe Pulizzi and Jason Miles.
For the webinar recording visit: http://bit.ly/mhpworksmarter
McGraw-Hill Professional Business Insider Work Smarter Webinar Series presents Remarkable Leadership to Inspire Great Work.
Increase your leadership influence and inspire others as you make a difference that others will love with eight lessons from David Sturt and Perry Holley.
For the webinar recording visit: http://bit.ly/mhpworksmarter
Tasti D-lite has put itself on the map through its innovative merging of loyalty programs and social media. The Tasti-D-lite Way, the brand’s Chairman/CEO and VP of Technology reveal key lessons any company can use to build meaningful customer experiences and unprecedented loyalty through fresh approaches to social media marketing.
Using social media to engage customers is only part of the story. Here, readers will learn how to re-engineer businesses to compete and win in the age of social media marketing, and break through from being a brand that’s social friendly to one that forms meaningful, one-to-one relationships with their customers.
A quick look at today’s most pressing business issues through the eyes of Peter Drucker—the father of modern management
As technology, globalization, and business innovation advance at breakneck speed, the question “What would Drucker do now?” becomes more relevant by the day. More than anyone of his time, Peter Drucker understood how the individual, the organization, and society are interrelated. And no one better recognized and articulated the challenges facing all three—or came up with more practical solutions to those challenges.
Since 2007, the Drucker Institute’s executive director, Rick Wartzman, has been asking what Drucker would do on a regular basis— in his popular online column for Bloomberg Businessweek. In each piece, Wartzman introduces a current issue and provides a view of it through the eyes of Peter Drucker, based on his deep knowledge of Drucker’s ideas and ideals.
In The Speed Traders, Edgar Perez, founder of the prestigious business networking community Golden Networking, opens the door to the secretive world of high-frequency trading (HFT). Inside, prominent figures of HFT drop their guard and speak with unprecedented candidness about their trade.
how to swap pi coins to foreign currency withdrawable.DOT TECH
As of my last update, Pi is still in the testing phase and is not tradable on any exchanges.
However, Pi Network has announced plans to launch its Testnet and Mainnet in the future, which may include listing Pi on exchanges.
The current method for selling pi coins involves exchanging them with a pi vendor who purchases pi coins for investment reasons.
If you want to sell your pi coins, reach out to a pi vendor and sell them to anyone looking to sell pi coins from any country around the globe.
Below is the contact information for my personal pi vendor.
Telegram: @Pi_vendor_247
Empowering the Unbanked: The Vital Role of NBFCs in Promoting Financial Inclu...Vighnesh Shashtri
In India, financial inclusion remains a critical challenge, with a significant portion of the population still unbanked. Non-Banking Financial Companies (NBFCs) have emerged as key players in bridging this gap by providing financial services to those often overlooked by traditional banking institutions. This article delves into how NBFCs are fostering financial inclusion and empowering the unbanked.
Poonawalla Fincorp and IndusInd Bank Introduce New Co-Branded Credit Cardnickysharmasucks
The unveiling of the IndusInd Bank Poonawalla Fincorp eLITE RuPay Platinum Credit Card marks a notable milestone in the Indian financial landscape, showcasing a successful partnership between two leading institutions, Poonawalla Fincorp and IndusInd Bank. This co-branded credit card not only offers users a plethora of benefits but also reflects a commitment to innovation and adaptation. With a focus on providing value-driven and customer-centric solutions, this launch represents more than just a new product—it signifies a step towards redefining the banking experience for millions. Promising convenience, rewards, and a touch of luxury in everyday financial transactions, this collaboration aims to cater to the evolving needs of customers and set new standards in the industry.
The Evolution of Non-Banking Financial Companies (NBFCs) in India: Challenges...beulahfernandes8
Role in Financial System
NBFCs are critical in bridging the financial inclusion gap.
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Economic Impact
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Introduction to Indian Financial System ()Avanish Goel
The financial system of a country is an important tool for economic development of the country, as it helps in creation of wealth by linking savings with investments.
It facilitates the flow of funds form the households (savers) to business firms (investors) to aid in wealth creation and development of both the parties
BYD SWOT Analysis and In-Depth Insights 2024.pptxmikemetalprod
Indepth analysis of the BYD 2024
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Founded in 1995 and headquartered in Shenzhen, BYD started as a battery company before expanding into automobiles in the early 2000s.
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1. Assessing Value in
Investment Decision Making
Kenneth S. Hackel, C.F.A.
President of CT Capital LLC
Security
Valuation
and Risk
Analysis
G
one are the days when executives
and corporate finance practitioners
could rely on discounted cash flow
analysis to value companies and make impor-
tant business and investment decisions. In to-
day’s market, it’s credit that really matters, and
now there’s a superior tool to help analyze it—
Security Valuation and Risk Analysis.
In this pioneering book, valuation authority
Kenneth Hackel presents his next-generation
methodology for placing a confident value
on an enterprise and identifying discrepancies
in value—a system that will provide even the
most well-informed investor with an important
competitive advantage.
At the core of Security Valuation and Risk
Analysis is Hackel’s successful credit model for
determining an accurate fair value and reliable
discount rate for a company. Using free cash
flow as the basis for evaluating return on in-
vested capital is the most effective method for
determining value. Hackel takes you step by
step through years of compelling evidence that
shows how his method has earned outsized
returns and helped turn around companies that
were heading toward failure.
Whether used for corporate portfolio strategy,
acquisitions, or performance management, the
tools presented in Security Valuation and Risk
Analysis are unmatched in their accuracy and
reliability. Reading through this informative
book, you’ll discover how to:
• Take advantage of early warning signs
related to cash flow and credit metrics
(continued on back flap)
• Estimate the cost of equity capital from
which free cash flows are discounted
• Identify where management can free up
resources by using a better definition of
free cash flow
Security Valuation and Risk Analysis provides a
complete education on cash flow and credit,
from how traditional analysts value a company
and spot market mispricing (and why many
of those traditional methods are obsolete) to
working with the most recent financial inno-
vations, including derivatives, special purpose
entities, pensions, and more.
Security Valuation and Risk Analysis is your
answer to a credit market gone bad, from an
expert who knows bad credit from good.
Kenneth S. Hackel is president of CT
Capital LLC, an investment advisory firm, and
founder and past president of Systematic Fi-
nancial Management, Inc. An internationally
recognized expert in security analysis, he has
managed the nation’s leading mutual fund, a
very successful investment advisory firm, and
has consulted and written on mergers and
acquisitions and fairness opinions. Hackel lives
in Alpine, NJ.
(continued from front flap)
SECURITYVALUATION
ANDRISKANALYSIS
A superior new replacement to traditional
discounted cash flow valuation models
In the aftermath of the financial meltdown, the models commonly used for discounted cash flow valuation have
become outdated, practically overnight. To meet the demand for an authoritative guidebook to the new economy,
internationally recognized expert Kenneth Hackel has written Security Valuation and Risk Analysis.
Packed with an arsenal of tools and know-how, this groundbreaking book shows you how to accurately analyze credit
to determine the true value of a company and its ability to make a return on investors’ money. The author’s break-
through approach helps you determine the attractiveness of a company based on its free cash flow, credit, and valuation
characteristics. In-depth and easy to use, Security Valuation and Risk Analysis:
• Equips you with a revolutionary credit risk model to make confident and realistic valuations on any enterprise
• Explains why cash flow trumps productivity when valuing a company
• Offers a metric for clearly measuring the abilities of senior management
• Provides a comprehensive model to determine cost of capital, replacing the historically
inaccurate capital asset pricing model
• Describes important adjustments to cash flow from operations that ensure
the computation of free cash flow
A renowned expert on the subject of free cash flow analysis, Kenneth S. Hackel brings his credit-based valuation
method to life with examples from his personal experience. With firsthand insight, he shows you how his models and
other popular models fared when he used them to determine the cost of equity capital for IBM and to analyze how
building a new refinery would affect Sunoco. Other such examples are discussed throughout the text.
The evidence is clear—investors who understand cash flow and credit will gain an important competitive advantage in
today’s market. See a company for what it’s really worth with Security Valuation and Risk Analysis.
ISBN 978-0-07-174435-5
MHID 0-07-174435-5
9 7 8 0 0 71 7 4 4 35 5
5 8 5 0 0
USD $85.00
Finance / Investing $85.00 USD
HACKEL
2. 282 Security Valuation and Risk Analysis
INTERNAL AND EXTERNAL CAPITAL
Most publicly held companies are financed by a mixture of internal and external
capital. Internal capital consists of all financial instruments that, in effect, pro-
vide holders with an equity position in the firm. Examples include common
stocks, convertible instruments such as preferred stocks and bonds that, for all
practical purposes, can be considered as already converted into common stock,
stock warrants, stock rights, and so on. External capital can be defined as all
financial obligations to outsiders who are not likely to become equity holders in
the firm. Examples are short-term debt owed to banks and bonds that are not
likely to be converted to common stock. Other examples of external capital are
obligations of the firm under leases, guarantees made by the firm, and other off-
balance-sheet liabilities such as debt related to a joint venture and various deriv-
ative securities.2
F I G U R E 6-1
Total Debt/Shareholders’ Equity for Various Industries, Fiscal Year
Ending (FYE) 2008
2
In some cases, a supplier will provide a customer with free equipment and even inventory in
exchange for the customer using the firm as a supplier.
06_Hackel 9/6/10 4:48 PM Page 282
3. Financial Structure 283
Traditional financial theory states that a firm has an optimal financial struc-
ture when there is is an optimal balance between internal and external capital.3 In
practice, corporate executives attempt to minimize the weighted-average cost of
capital using all forms of internal and external capital consistent with the risk level
of the firm.
The term optimal financial structure is an illusory term. It shifts with changes
in cost of capital, which encompasses market perception (i.e., valuation multiples
and yield spreads), cash flows, taxes, debt levels, litigation risk, risk-free rate, and
other variables discussed in Chapter 8.
One well-known study suggests that owing to the tax benefits of debt and
the fact that debt holders pay bankruptcy costs, leverage ratios should be high to
attain the optimal capital structure.4
Leland claims that leverage for most com-
panies is optimal at about 75 to 95 percent and that firms with high risk and high
bankruptcy costs should have leverage on the order of 50 to 60 percent when
their effective tax rate is 35 percent. Leland does not broach volatility of tax
rates, an important determinant of my credit model. He does not discuss cash
flow or cash tax rate in his paper despite the fact it is cash-flow adequacy that
keeps entities from avoiding bankruptcy. Litigation risk is not mentioned, but
debt covenants are.
Benefits and costs are associated with external capital. For example, as
Leland explains, interest payments on debt are tax deductable, whereas dividend
payments to preferred and common stockholders are not deductable to the
firm and are taxable to shareholders. Thus the firm has a clear incentive to raise
external capital. However, external capital may dilute the implicit control of
equity holders because the firm is subject to greater scrutiny by rating agencies
and creditors. Also, if at any period the firm’s cash flows are insufficient to
service its debt, the firm may be forced into operating decisions it would prefer
not to make or even confront bankruptcy, exposing equity holders to additional
unexpected costs (including the issuance of additional equity). Firms steering
down such as path may be forced to sell assets that have been reliable producers
of free cash flow because these properties meet with the greatest demand by
potential acquirers.
3
Miller and Modigliani showed in 1961 (Journal of Business) that it does not matter how a firm
finances itself. Ross (Bell Journal of Economics, 1977) and Leland and Pyle (Journal of Finance,
1977) show that an optimal financial structure exists because of signaling costs. Lewellen (Journal
of Finance, 1975) and Galai and Masulis (Journal of Financial Economics, 1984) show that an
optimal financial structure exists because of bankruptcy costs and taxation.
4
See “Corporate Debt Value, Bond Covenants and Optimal Debt Structure,” by Hayne Leland
(Journal of Finance, September 1994).
06_Hackel 9/6/10 4:48 PM Page 283
4. 284 Security Valuation and Risk Analysis
Other financial theories suggest that entrepreneurs have incentives to issue
shares in their firms to the public, in effect, raising more internal capital when they
consider current stock prices too high. Thus they issue additional shares of the
firm to the public and enjoy the benefits of cash infusion into the firm that is not
justified by the firm’s cash flows. Conversely, when firms purchase stock in them-
selves, they likely consider the price too low compared with their cash flows. Thus
they repurchase the firm’s stock, reducing internal capital. In reality, while many
soundly financed firms with good cash flows have repurchased their own stock,
too many others have done so succumbing to the pressure of vocal shareholders
who believed that buyback programs will lend support to the stock price, imply-
ing that the stock price was not correctly discounting prospective free cash flow.
Also, for a firm to constantly buy and sell its own stock would send a signal to the
financial markets that could harm the stock valuation. Besides, no company has a
crystal ball.
Information asymmetry almost always exists between insiders and outside
investors, and it also may exist between shareholders and bondholders. For
example, stock repurchases reduce total shareholders’ equity, and shareholders
may wish to accept certain capital projects or acquisitions that are too risky for
bondholders.
One common characteristic of all financial theorists is that the financial
structure of a firm does not usually lie in either extreme case; that is, firms are nei-
ther all equity nor all debt. Rather, they are a mixture of internal and external cap-
ital. Another common characteristic of the theories is that firms are not at their
optimal structure at all times. Instead, they continuously make adjustments to their
financial structure in an attempt to react to changing economic and market condi-
tions so that they can reach their new optimal financial structure. Thus we should
observe that firms adjust their capital structure in almost every period, as can,
indeed, be verified from any casual examination of the financing cash flows of
firms. These adjustments are more earmarked toward leverage, not equity
issuance.
Can one predict how adjustments to the financial structure of a firm should be
related to operating and free cash flow? To answer this question, recall that one of
the major disadvantages of external capital is the possibility of bankruptcy and reor-
ganization costs to shareholders. These expected costs relate to the likelihood of
financial difficulties for the firm; the higher the likelihood of financial difficulties,
the greater are the expected bankruptcy costs, and the more costly external financ-
ing becomes. An immediate variable to consider for the likelihood of financial dif-
ficulties is the stability of operating and free cash flow. The more stable5 operating
5
I define stability in Chapter 8.
06_Hackel 9/6/10 4:48 PM Page 284
5. Financial Structure 285
and free cash flows are, the lower is the probability of financial difficulties, and the
lower is the probability of bankruptcy. Thus firms with stable but growing operating
and free cash flows are expected to be characterized by higher financial leverage
than their counterparts, where financial leverage can be measured by the relative
proportion of debt to equity, including all forms of external financing. Such firms are
also more likely to be increasing external capital at the expense of internal capital.
Assumed in all this is the soundness of the nation’s banking system and, for individ-
ual entities, the soundness, reliability, and diversity of any backup financing agree-
ments in place.
For entities that have entered bankruptcy but have shown a history of ade-
quate but cyclicality in their cash flows, creditors have a reasonable opportunity
at recouping some to all of their capital. Pilgrim’s Pride, a large poultry company,
saw its senior unsecured debt trade as low as 14 cents on the dollar with the firm
being in Chapter 11 bankruptcy; when the firm was offered $2.6 billion in a buy-
out, those bonds went back up to par. Unfortunately, stockholders received very
little from the deal.
Firms that exhibit volatile operating cash flows and firms that are character-
ized by negative free cash flow are expected to have lower financial leverage and,
on average, are expected to show decreases in debt and increases in equity financ-
ing when conditions permit.
While the optimal financial structure is one of constant debate, in reality, it
can be only determined with perfect foresight. This is so because the optimal mix
of debt and equity is a function of future cash flows and the assets required to pro-
duce those cash flows. If the firm knew for certain its operating cash flows, it
would adjust its capital structure accordingly, including lining up any necessary
financing that needed to take place from secure sources. The optimal structure
would, in essence, be that level where the entity is capable of producing the high-
est free cash flow consistent with its ability to retire its contractual obligations
and allowing a measure of financial flexibility. There is a continual dynamic
tradeoff between that financial structure and the time it takes for normalized
operating cash flows to retire all outstanding obligations. Investors and corporate
executives must evaluate the risk of nonpayment of debt if the operating cash
flows are less than expected and whether the increase in leverage ratios is worth
the added cash flows. As we saw in the case of Clorox, part of the analysis is
available liquidity aside from what is listed on the balance sheet. Committed
unused credit lines, including contingent equity, must be considered when evalu-
ating the optimal structure for a particular company. Two companies having the
same expected operating and free cash flows should have different leverage ratios
if they have dissimilar credit lines available. Likewise, if they have dissimilar
costs of capital, the company having the less risk (lower cost of capital) would be
expected to withstand higher leverage.
06_Hackel 9/6/10 4:48 PM Page 285
6. 286 Security Valuation and Risk Analysis
Cash-flow analysis can provide worthwhile clues to impending financial
risk and return. Unfortunately, many entities reporting a healthy operating gain
after years of negative free cash flow often find themselves unprepared to oper-
ate during an ensuing business downturn. Because traditionally they have been
heavy users of cash (with commensurate increases in debt), they cannot build
the sufficient liquidity cushion necessary as conditions improve. Some entities,
however, have been successful using a financing “window” to enhance their
capital structure.
Example:
Temple Inland, Inc., manufactures corrugated packaging and building products and had $3.8 billion
in revenues during fiscal year 2008. As reported on its balance sheet, Temple Inland has $41 million
in cash and minimal short-term debt coming due.
TEMPLE INLAND, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
At Year-End (in Millions)
2008 2007
ASSETS
Current assets:
Cash and cash equivalents $41 $227
Trade receivables, net of allowance for doubtful accounts
of $14 in 2008 and 2007 407 433
Inventories:
Work in process and finished goods 104 116
Raw materials 217 224
Supplies and other 137 121
Total inventories 458 461
Deferred tax asset 66 99
Income taxes receivable 57 —
Prepaid expenses and other 44 57
Total current assets 1,073 1,277
Property and equipment:
Land and buildings 671 641
Machinery and equipment 3,577 3,423
Construction in progress 36 120
Less allowances for depreciation (2,620) (2,552)
Total property and equipment 1,664 1,632
06_Hackel 9/6/10 4:48 PM Page 286
7. Financial Structure 287
At Year-End (in Millions)
2008 2007
Financial assets of special-purpose entities: 2,474 2,383
Goodwill 394 365
Other assets 264 285
Total assets $5,869 $5,942
Liabilities
Current liabilities:
Accounts payable $162 $244
Accrued employee compensation and benefits 84 108
Accrued interest 30 31
Accrued property taxes 12 11
Accrued income taxes — 258
Other accrued expenses 140 173
Current portion of long-term debt 1 3
Current portion of pension and postretirement benefits 17 62
Total current liabilities 446 890
Long-term debt: 1,191 852
Nonrecourse financial liabilities of special-purpose
entities 2,140 2,140
Deferred tax liability 750 762
Liability for pension benefits 172 71
Liability for postretirement benefits 101 123
Other long-term liabilities 292 324
Total liabilities 5,092 5,162
Noncontrolling Interest of Special-Purpose Entities 91 —
Shareholders’ equity:
Preferred stock—par value $1 per share, authorized
25,000,000 shares, none issued — —
Common stock—par value $1 per share, authorized
200,000,000 shares, issued 123,605,344 shares in
2008 and 2007, including shares held in the treasury 124 124
Additional paid-in capital 461 475
Accumulated other comprehensive loss (189) (139)
Retained earnings 936 987
Cost of shares held in the treasury: 17,098,808 shares
in 2008 and 17,464,189 shares in 2007 (646) (667)
Total shareholders’ equity 686 780
Total liabilities and shareholders’ equity $5,869 $5,942
06_Hackel 9/6/10 4:48 PM Page 287
8. 288 Security Valuation and Risk Analysis
We see, however, that the company has significant debt maturing over its coming three
years. Also on the balance sheet is an entry associated with its special-purpose entity, which
relates to the sale of timberland through nonrecourse notes and would need to be investigated
for any potential financial liabilities.
Temple Inland reports:
Maturities of our debt during the next five years are (in millions): 2009—$33; 2010—
$191; 2011—$163; 2012—$293; 2013—$0; and thereafter—$512. We have classified
$32 million of 2009 stated maturities as long-term based on our intent and ability to refi-
nance them on a long-term basis.
Given the cyclicality of its business, the company has been dependent on economic conditions
to generate free cash flow. When reviewing this company, the analyst would be apprehensive that
the company may be forced to pay a high cost of debt to refinance the coming obligations. Temple
Inland states in a footnote that its $835 million in committed credit agreements expires by 2011.
If the company decided to completely take down the $835 million to repay the debt coming due, it
would have less than a year to repay that entire obligation—the date the credit line expired.
Obviously, an analyst would prefer to see these debts coming due extended as soon as possible.
Example:
SkyTerra Communications, Inc., through its subsidiaries, provides mobile satellite communica-
tions services in the United States and Canada. For the 11 years shown in Table 6-1, SkyTerra
Communications has shown just one year of limited free-cash-flow generation as its market value
fell from almost $1.4 billion down to $18 million and then rose to $740 million. The sole reason
SkyTerra recorded positive free cash flow during 2004 was that it was working its balance sheet;
otherwise, its free cash flow would have been negative for all years shown in the table.
T A B L E 6-1
SkyTerra Communications, Inc.
December Net Income Free Total
Year End (Loss) Cash Flow Total Debt Market Value
1998 Ϫ0.6 Ϫ9.6 — —
1999 Ϫ49.5 Ϫ84.6 2.6 1,375.0
2000 Ϫ124.7 Ϫ113.1 0.1 121.2
2001 Ϫ210.3 Ϫ52.3 0.0 47.1
2002 Ϫ4.0 Ϫ20.8 0.0 18.0
2003 Ϫ0.7 Ϫ15.4 0.0 22.6
2004 17.2 5.5 0.0 403.1
2005 59.3 Ϫ15.3 0.0 677.3
2006 Ϫ57.1 Ϫ33.4 483.9 740.3
2007 Ϫ123.6 Ϫ71.1 604.8 696.5
2008 Ϫ204.9 Ϫ89.4 838.2 193.4
Source: CT Capital, LLC.
06_Hackel 9/6/10 4:48 PM Page 288
9. Financial Structure 289
Executives at the company took advantage of two positive years in earnings, especially 2005,
when earnings showed a substantial jump, allowing management to raise almost $500 million in
the debt market. Free cash flow again was negative that year, but both equity and fixed-income
investors looked the other way, perhaps fixating on reported income. Investors who looked at the
common free-cash-flow definition of net income plus depreciation also were fooled because that
measure during 2004–2006 showed relative stability. In 2007 and 2008, as cash flows remained
negative, the company was continually allowed to reenter the debt markets, forcing up leverage on
lower capital.
This company was successful at raising almost $275 million in the year 2000, which allowed
it to stay in business during 2001, when it reported a large loss along with continued negative free
cash flow.With the loss, the credit markets were closed to the company, and as we see from Table
6-2, capital spending was, in essence, eliminated as revenues remained at basically zero.
SkyTerra was able to raise large amounts of equity and debt despite having a minimal rev-
enue base. Normally, when firms such as SkyTerra have consistent negative free cash flow, it is
an irrefutably negative signal because the original projections were not met. When such firms
continually enter the debt markets, it bears closer watching, and it is indeed a risky proposition
for creditors if they are not accorded a security interest in assets worth at least the principal
amount of the loan. When revenues rose to $35 million in 2006, management jumped at the
chance to raise capital again. Unfortunately, free cash flow continued to be negative, and
SkyTerra’s market value subsequently declined by over 75 percent.
SkyTerra Communications, Inc.
Ticker: 3SKYT
December Year End Sales ($M) Free Cash Flow ($M)
2002 0.0 (20.8)
2003 0.7 (15.4)
2004 2.1 5.5
2005 0.6 (15.3)
2006 34.9 (33.4)
2007 34.1 (71.1)
2008 34.5 (89.4)
It is not surprising that financial structure and cost of capital are closely
related because credit and possible impairment to cash flows play a central role in
risk analysis. Cost of capital, as with financial structure, is established by an entity’s
ability to produce cash flows—magnitude, growth rate, consistency, and capital
intensity, as well as the other fundamental credit metrics enumerated in Chapter 8.
Entities having uncertain cash flows should carry less total debt, whereas
entities having more predictable streams could have greater leverage.6 For new
6
For purposes of discussion, I refer to operating companies as opposed to companies in full or par-
tial liquidation. Also excluded are companies that have raised sufficient equity capital with a low
cash burn rate so that the cash could satisfy all outstanding claims. The cash burn rate is explained
later in this chapter.
06_Hackel 9/6/10 4:48 PM Page 289
10. 290 Security Valuation and Risk Analysis
organizations, the financial structure should be geared toward equity and the rais-
ing of equity capital if additional financing is needed. Unless the new enterprise is
virtually assured of being in a position to repay borrowings, including principal,
leverage is discouraged. For a fortunate entity whose debt retirement is very likely
and prospective free cash flow is large, maximum leverage is judicious.
More cyclical firms or those with unstable cash flows will have a higher
cost of debt owing to their questionable ability to repay principal and interest. If
the cyclical concern is at the top of the operating cycle, where operating margins,
free cash flow, and stock price are strongest, it should seriously consider selling
shares, even if the cash is not currently needed. It should do this for three reasons:
(1) so that it is not forced to sell high-cost equity during an ensuing downturn,
(2) so that it can later take advantage of investment opportunities, including
in-house research, which its weakened competitors cannot, with its low cost cap-
ital, and (3) so that its financial strength can grow market share through pricing.
Being overcapitalized has its virtues, but as mentioned, if the entity continually
T A B L E 6-2
Selected Investing and Financing Data: SkyTerra
SKYTERRA COMMUNICATIONS INC
TICKER: 3SKYT
SIC: 4,899.000
GICS: 50102010
Stockholders’ Capital Sale of Com/ Issuance of Reduction in Financing
Equity Expenditures Pref Stock LT Debt LT Debt Activ-Other
Dec98 29.822 0.912 0.118 0.000 0.108 0.000
Dec99 141.215 8.792 94.789 6.000 1.245 0.000
Dec00 280.407 24.491 247.038 @CF 0.915 0.000
Dec01 128.862 0.095 0.022 0.000 0.000 10.000
Dec02 81.297 0.000 16.971 0.000 0.000 0.177
Dec03 79.566 0.007 0.006 0.000 0.000 (1.195)
Dec04 134.084 0.839 35.328 0.000 0.000 (2.913)
Dec05 191.485 0.003 0.140 0.000 0.000 0.076
Dec06 (119.943) 99.063 0.713 423.052 0.225 0.000
Dec07 616.218 240.494 1.123 1.058 0.247 0.000
Dec08 471.353 177.101 0.064 150.000 0.910 0.000
06_Hackel 9/6/10 4:48 PM Page 290
11. Financial Structure 291
taps the market at perceived peaks, it will send the wrong signal to investors
(of prospective diminishment of cash flows), causing a stock decline and making
such future sales unlikely.
If the entity under analysis is being studied for its ability to retire principal pay-
ments in a timely manner, it is total debt that must be used in the calculation of lever-
age ratios. Debt is debt—whether it is short-term bank debt, long-term subordinated
debt, sinking-fund requirements, operating leases, pension obligations, or purchase
commitments. They all represent legal liabilities that must be satisfied prior to share-
holders’ interest. For this reason, the maturing debt must match the enterprise’s
ability to service it. Again, this is addressed in Chapter 8.
Many popular financial ratios consider only long-term debt, thereby subject-
ing the leverage ratio to classification decision and conceivably manipulation. To
consider only long-term debt might result in a large and inappropriate shift in lever-
age ratios depending on such classification. Under Statement of Financial
Accounting Standards No. 78 (SFAS 78): Classification of Long Term Debt
Callable by the Creditor, if there is a violation of the debt agreement (covenant),
such long-term debt might need to be reclassified as a current liability, altering both
working capital and other ratios, which could impair the firm. Likewise, if the debt
has a call feature and is callable within a year, it must be reclassified as a current
liability, affecting working capital and similar ratios, which also could impair the
firm or affect debt covenants.
Low leverage does not ensure an entity a low cost of capital if the firm does not
generate free cash flow or have other positive metrics, as discussed in Chapter 8. As
of October 1, 2009, there were 323 industrial companies having 40 percent or lower
total debt/shareholders equity, a market value in excess of $100 million, greater than
10 percent cost of equity capital, and three-year negative average of free cash flow.
Their five-year total stock return, thereby encompassing not just the three-year period
of negative free cash flow but two years prior, showed a negative 4.9 percent total
rate of return compared with a positive 2.4 percent for the Standard and Poor’s
(SP) 500 Index.
For entities undergoing large capital expansion programs in the belief that
the project will contribute to free cash flow, such as Wynn Resorts, total leverage
will increase until the operating cash flows from the project are able to return the
debt ratios back to acceptable levels. Such temporary strains to shareholders’
equity should be balanced with additional equity raises in the event that market
conditions work against projected revenues and cash flows. If the equity raise
comes after market conditions turn down, the incremental cost of capital would be
much higher than if part of the initial raise occurred when optimism for the proj-
ect was at its peak. We see this with every recession, when capital becomes scarce
and costs extreme.
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12. 292 Security Valuation and Risk Analysis
In the midst of the credit crunch in 2009, Wynn was forced to raise $175 mil-
lion by selling 9.6 million shares at $19 per share, when a year earlier its stock sold
at as high as $119; a mere four months after the equity sale, its stock was back to
$57. If it had a more balanced approach to the initial capital raise during 2007, tak-
ing into account the possibility of an economic downturn, dilution would have
been very minor, and given its low cost of capital resulting from its then-stronger
balance sheet, Wynn stock would not have sold off as greatly during the capital
crunch. Six months after the $175 million raise, Wynn raised an additional
$1.6 billion by selling 25 percent of its high-growth Macau properties through an
initial public offering (IPO).
Debt taken on to fund the purchase of assets should be able to be tied directly
to operating cash flows used in the retirement of that debt. The financing decision
must match the investment decision. Banks that borrow short and loan long learn
this lesson with each downturn.
As stated, startups, including companies that are expected to incur negative
cash flows, should have as little debt as possible (preferably none), along with a
substantial capital cushion. These companies often go through longer than expected
periods of cash burn, with their only cash inflow resulting from interest income.
This was the case with a 2005 IPO, Nucryst Corporation, a medical products
company based on a proprietary metal technology. While the capital raise brought
it time and cash to expand, its business never took hold and was unable to produce
free cash flow. We see in the firm’s 2008 10K balance sheet an accumulated deficit
of $41 million. When an entity is continually burning cash, it remains to be seen
how long it will continue as a viable independent concern.
T A B L E 6-3
Companies with Low Leverage and High Cost of Equity Capital
Three-Year
Cost of Average Free Total Debt/ Five-Year
Company Capital (%) Cash Flow Net Worth Total Return
ATS Medical 17.5 (6.3) 32.3 (5.8)
Ballard Power 18.3 (35.3) 0 (23.2)
Enzo Biochem 15.3 (7.1) 0 (17.3)
Golden Star Res. 12.9 (95.9) 29.1 (10.7)
Lexicon Pharma. 11.5 (62.8) 11.5 (24.2)
Microvision 18.2 (23.5) 18.2 (11.2)
Tejon Ranch 13.2 (0.4) 13.2 (7.2)
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13. Financial Structure 293
NUCRYST PHARMACEUTICALS CORP.
CONSOLIDATED BALANCE SHEETS
December December
31, 2008 31, 2007
(Thousands of U.S. Dollars,
Except Share Data)
Assets
Current
Cash and cash equivalents $23,388 $17,841
Accounts receivable—net (note 4) 5,062 14,924
Inventories (note 5) 2,887 4,426
Prepaid expenses 414 427
31,751 37,618
Restricted cash (note 2g) 145 140
Capital assets—net (note 6) 9,379 12,734
Intangible assets—net (note 7) 525 807
$41,800 $51,299
Liabilities and Shareholders’ Equity
Current
Accounts payable and accrued liabilities (note 8) $2,859 $3,650
Accounts payable and accrued liabilities to related party
(note 12) — 67
Deferred lease inducement (note 2m) 90 111
2,949 3,828
Long-term deferred lease inducement (note 2m) 495 726
3,444 4,554
Guarantees (note 13)
Commitments (note 14)
Shareholders’ Equity
Common shares no par value, unlimited shares
authorized, issued and outstanding—18,320,531 and
18,367,563 shares on December 31, 2008 and 2007,
respectively (note 10) 82,776 82,776
Additional paid-in capital 2,178 1,511
Accumulated other comprehensive (loss) income
(note 2d) (5,528) 557
Accumulated deficit (41,070) (38,099)
Total shareholders’ equity 38,356 46,745
$41,800 $51,299
Source: Nucryst Pharmaceuticals 2009 10K.
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