Thursday, January 28, 2016

Companies Plan To Decrease Cash

In the second quarter of 2015, S&P non-financial firms held $1.4 trillion in cash. And the percentage of companies that increased cash and short-term investments was expected to increase in the fourth quarter of 2015. However, a recent survey indicates that more companies are expected to decrease cash in the first quarter of 2016 than companies that increase cash balances. Overall, Treasurers appear to be doing very little with cash, waiting to see what happens in October when the SEC's new money market rules take effect.

Monday, January 18, 2016

American Airlines Political Risk

Although we don't delve deeply into political risk as it is beyond the scope of the textbook, it is a risk borne by multinationals as American Airlines found out. American recently announced that it would take a $592 million special charge in the fourth quarter as a result of Venezuelan currency controls. Venezuela's socialist government forces airlines to sell airfares in bolivars, but makes conversion of the bolivars into U.S. dollars difficult. As a result, American has bolivars trapped in Venezuela.

Wednesday, January 13, 2016


If you are reading this post, you likely have just begun your Corporate Finance class. While you may be apprehensive about the topic, we believe you can learn a lot of very applicable and important topics, not only for your business acumen, but skills that will help you in important personal financial decisions, such as paying points up front to reduce your mortgage interest rate, or how much your repayments will be increased if you take out that extra student loan. Or, should you take annual cash payouts or lump sum if you hit the Powerball jackpot tonight? We wish you well in your Finance class and believe this textbook will increase your understanding of Finance and won't be in  Japanese to you at the end of the semester.

Monday, January 11, 2016

David Bowie: Financial Genius

We were saddened to hear of the death of groundbreaking singer and musician David Bowie. And while you may know him from Ziggy Stardust and the Spiders from Mars and his numerous other works, you may be surprised that he was pretty good in finance as well. In 1997, Bowie was the first to issue "celebrity bonds," better known as "Bowie bonds." He sold the royalties from 25 albums released from 1969 to 1990 for $55 million to Prudential as bonds with a 7.9 percent coupon rate. Because the bonds carried interest, they were considered a loan, which meant that Bowie got the money without the tax liability. Then, in 2000, Bowie launched BowieBanc in conjunction with, although that venture was short-lived. Fortunately, we predict the legacy of David Bowie will be with us much longer.

Wednesday, January 6, 2016

The Return On Powerball

At the current projected value of $450 million, tonight's Powerball jackpot will be the sixth largest lottery payout in history. The winner has a choice of $275.4 million today today, or 30 payments of $15 million with the first payment today. So, what is the break-even interest rate on this choice? Verify for yourself that it is about 3.8 percent. Good luck and we hope you are "stuck" with this choice.

Tuesday, January 5, 2016

IPO Investing

You have probably read the box in the textbook from our favorite IPO guru, Professor Jay Ritter. Recently, Dr. Ritter wrote an article for Forbes that discusses a specific type of IPO that has proven profitable for investors. Growth capital-backed IPOs, which are companies backed by venture capitalists or private equity firms and invest in tangible assets, have proven to be winners. Since 1980, these firms have a 3-year average return of 61 percent if bought at the end of the first day of trading. Dr. Ritter's recommendations for 2014 had an 11 month return of 20.6 percent, which is a return we would like. So which 2015 IPOs does he recommend? Summit Materials (SUM), DavidsTea (DTEA), Blue Buffalo Pet Products (BUFF), and Surgery Partners (SGRY) all meet the growth-capital IPO criteria.