tag:blogger.com,1999:blog-29328314026428216602024-03-06T11:41:22.823-08:00Fundamentals of Corporate FinanceStephen A. Ross, Randolph W. Westerfield, Jeffrey J. Jaffe, Bradford D. Jordan, Joseph C. Smolirahttp://www.blogger.com/profile/09769844097171948359noreply@blogger.comBlogger443125tag:blogger.com,1999:blog-2932831402642821660.post-63980667191701378562024-03-06T11:40:00.000-08:002024-03-06T11:40:28.128-08:00Deriving Options<p>What do olive presses, Las Vegas, and random walks have in common? The Black-Scholes Option Pricing model! A really interesting <a href="https://www.youtube.com/watch?v=A5w-dEgIU1M" target="_blank">Veritasium video</a>
walks through a brief history of options and the mathematics behind the
Black-Scholes model. And while the video does a good job of explaining
option basics, it also discusses some of the beauty behind the math. <br /></p>Stephen A. Ross, Randolph W. Westerfield, Jeffrey J. Jaffe, Bradford D. Jordan, Joseph C. Smolirahttp://www.blogger.com/profile/09769844097171948359noreply@blogger.comtag:blogger.com,1999:blog-2932831402642821660.post-87489329671740758152024-02-28T13:51:00.000-08:002024-02-29T10:38:28.638-08:00Project Titan(ic)<p>In 2014, Apple was rumored to have approved Project Titan, Apple's
development of an electric car. In 2015, Apple formally introduced the
new project. At its height in 2018, Project Titan employed 5,000 people.
Now, nearly a decade later after it started, <a href="https://www.reuters.com/technology/apple-cancels-work-ev-moves-staff-ai-project-bloomberg-reports-2024-02-27/" target="_blank">Apple announced</a>
that it is shutting down Project Titan, thereby exercising the option to abandon. With
shrinking demand for electric cars, Apple must have believed that
spending more money on the new car isn't worth the payoff, even though
Apple had reportedly already spent more than $10 billion on the project. We will likely
see a write off announcement in the next several months detailing the
total spent on the project. Apple has utilized another option as it also
announced that many of the Project Titan employees would begin working
on AI technology. Fortunately for Apple, it doesn't appear the money spent on this project will sink the company.</p>Stephen A. Ross, Randolph W. Westerfield, Jeffrey J. Jaffe, Bradford D. Jordan, Joseph C. Smolirahttp://www.blogger.com/profile/09769844097171948359noreply@blogger.comtag:blogger.com,1999:blog-2932831402642821660.post-70656582423359842562024-02-11T11:00:00.000-08:002024-02-12T11:44:49.154-08:00NYCB Dividend Cut<p>Banks stocks are generally affected by interest rates and
New York Community Bancorp (NYCB) is no different. NYCB has a large amount of loans
tied to New York City apartments and commercial real estate. With high interest
rates, New York City rent control policies, and changing demand for commercial
real estate in New York City, investors are concerned about the bank's future
performance. On January 31, 2024, the <a href="https://seekingalpha.com/article/4668613-more-dividend-cuts-possible-new-york-community-bancorp-sa-quant" target="_blank">company
announced</a> that it would slash its quarterly dividend from 4.17 to $.05, a
70 percent cut. Investors were none too pleased as the stock dropped from
$10.38 to $6.47, a 37 percent fall in one day. To see this, check out the stock
price chart from<a href="https://finance.yahoo.com/" target="_blank">
finance.yahoo.com</a> below. <br /></p><p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjg57eeRiNKKJ6Y7JSa88cuC2gzxfch6Hj0VA8OLjswEk2CbVpBB2YwEy9Cjrgxl-oP7yJCqPw9n8xXiqJVnyN3D-RINjHKitX-wfTbyOV_iA8hIbfRlsjhFCsRXRh7NPbjvBTzvXnSeCWIesGsiyHcRfflddg1LUOWEN5jzkm53FFQQfkhvSd_iQ2FXng/s667/NYCB.PNG" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="411" data-original-width="667" height="197" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjg57eeRiNKKJ6Y7JSa88cuC2gzxfch6Hj0VA8OLjswEk2CbVpBB2YwEy9Cjrgxl-oP7yJCqPw9n8xXiqJVnyN3D-RINjHKitX-wfTbyOV_iA8hIbfRlsjhFCsRXRh7NPbjvBTzvXnSeCWIesGsiyHcRfflddg1LUOWEN5jzkm53FFQQfkhvSd_iQ2FXng/s320/NYCB.PNG" width="320" /></a></div><br /><br />Stephen A. Ross, Randolph W. Westerfield, Jeffrey J. Jaffe, Bradford D. Jordan, Joseph C. Smolirahttp://www.blogger.com/profile/09769844097171948359noreply@blogger.comtag:blogger.com,1999:blog-2932831402642821660.post-20228119402996447062023-06-04T10:47:00.002-07:002023-06-04T10:47:49.470-07:00The Shortest Treasury Bills<p>As we mentioned in the textbook, generally the shortest Treasury bills
issued are 13 week maturity. However, given the recent debt ceiling
problems, the Treasury issued cash management bills (CMBs), with a one
day maturity. On Friday, June 2, the <a href="https://www.cnn.com/2023/06/01/business/treasury-bill-auction/index.html" target="_blank">Treasury sold $15 billion</a>
in one day CMBs, to be issued on June 5 that mature on June 6. Over the
past 25 years, the Treasury has held six CMBs auctions with a maturity
of one day. And on June 1, the Treasury auctioned $25 billion in
three-day bills. <br /></p>Stephen A. Ross, Randolph W. Westerfield, Jeffrey J. Jaffe, Bradford D. Jordan, Joseph C. Smolirahttp://www.blogger.com/profile/09769844097171948359noreply@blogger.comtag:blogger.com,1999:blog-2932831402642821660.post-12559995515484467842023-06-04T10:30:00.002-07:002023-06-04T10:30:47.519-07:00Accounting Fiction?<p><a href="A recent article in the Wall Street Journal notes that as of May 26, 77 percent of the 485 companies in the S&P 500 that had reported earnings beat earnings, compared to the historical rate of 66 percent. What is even more surprising is that the earnings beats are 6.9 percent above expectations, compared to a 4.1 percent historical average. But accounting choices, which have been labeled as potential earnings manipulation, may be the cause. For example, Google extended the life of its server infrastructure from four years to six years. The extension added 6 cents per share to earnings due to lower depreciation. The company also shifted employee stock awards from January to March, which also increased reported earnings. And Carvana, which was expected to lose $2.03 per share only lost $1.51 per share. The company had taken charges in the previous quarter when used car prices had plummeted and expected to sell cars for less. When used car prices increases, the company unwound those loses, increasing earnings per share by $.48, almost all of the earnings beat. " target="_blank">A recent article </a>in the <i>Wall Street Journal</i>
notes that as of May 26, 77 percent of the 485 companies in the S&P
500 that had reported earnings beat earnings, compared to the
historical rate of 66 percent. What is even more surprising is that the
earnings beats are 6.9 percent above expectations, compared to a 4.1
percent historical average. But accounting choices, which have been
labeled as potential earnings manipulation, may be the cause. For
example, Google extended the life of its server infrastructure from four
years to six years. The extension added 6 cents per share to earnings
due to lower depreciation. The company also shifted employee stock
awards from January to March, which also increased reported earnings.
And Carvana, which was expected to lose $2.03 per share only lost $1.51
per share. The company had taken charges in the previous quarter when
used car prices had plummeted and expected to sell cars for less. When
used car prices increases, the company unwound those loses, increasing
earnings per share by $.48, almost all of the earnings beat. <br /></p>Stephen A. Ross, Randolph W. Westerfield, Jeffrey J. Jaffe, Bradford D. Jordan, Joseph C. Smolirahttp://www.blogger.com/profile/09769844097171948359noreply@blogger.comtag:blogger.com,1999:blog-2932831402642821660.post-41299842061267765172023-02-19T13:07:00.001-08:002023-02-19T13:07:39.284-08:00A Green NPV<p>European low cost carrier Ryanair <a href="https://www.aviacionline.com/2023/01/ryanair-begins-installing-split-scimitar-winglets-on-its-boeing-737-800-fleet/" target="_blank">announced a new project</a>
that will install Split Scimitar winglets on each of the company's
Boeing 737-800s. The installation is expected to reduce fuel consumption
by 1.5 percent and reduce CO2 emissions by 165,000 tons per year. So,
the project is green for the environment, but is it green for stock
holders? A quick calculation shows that it is. Based on the numbers,
Ryanair spent <span style="font-family: "Times New Roman",serif; font-size: 12.0pt; mso-ansi-language: EN-US; mso-bidi-font-size: 11.0pt; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">€1.14 billion on fuel in a recent quarter</span>, which amounts to <span style="font-family: "Times New Roman",serif; font-size: 12.0pt; mso-ansi-language: EN-US; mso-bidi-font-size: 11.0pt; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">€4.56 billion per year. A 1.5 percent savings in fuel costs is
€68.4 million per year. This savings results in a payback period of 2.92
years</span>. Assuming a 10 percent discount rate and 20 years of operation, the NPV is <span style="font-family: "Times New Roman",serif; font-size: 12.0pt; mso-ansi-language: EN-US; mso-bidi-font-size: 11.0pt; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">about €</span>382 million. Sounds like a green, green project to us. <br /></p>Stephen A. Ross, Randolph W. Westerfield, Jeffrey J. Jaffe, Bradford D. Jordan, Joseph C. Smolirahttp://www.blogger.com/profile/09769844097171948359noreply@blogger.comtag:blogger.com,1999:blog-2932831402642821660.post-49822554867583824162023-01-25T11:06:00.001-08:002023-01-25T11:06:11.645-08:00Your Song (Is For Sale)<p>Any stream of cash flows can potentially be sold for the present value
of its cash flows. And one of the biggest cash flows being sold recently
is an artist's song catalog. The owner of a song catalog receives the
cash flows from the royalty paid whenever a song is played. It was
announced yesterday that <a href="https://www.cnn.com/2023/01/24/media/justin-bieber-music-catalog-reliable-sources/index.html" target="_blank">Justin Bieber's song catalog</a>
was sold for a reported $200 million. And although we agree that this
is a tidy sum, it is still smaller than the $500 million that Bruce
Springsteen or $300 million that Bob Dylan received last year for
similar sales. The price isn't cheap as song catalogs are reportedly
being sold for 30 times annual royalties. <br /></p>Stephen A. Ross, Randolph W. Westerfield, Jeffrey J. Jaffe, Bradford D. Jordan, Joseph C. Smolirahttp://www.blogger.com/profile/09769844097171948359noreply@blogger.comtag:blogger.com,1999:blog-2932831402642821660.post-30569048931721935042023-01-25T10:51:00.002-08:002023-01-25T10:51:14.784-08:00Future Stock Returns<p>As Mark Twain once said, "Prediction is difficult - especially about
the future." And while investors would wish otherwise, predictions about
the stock market are especially difficult. Many investors will use
historical returns as an estimate of future returns. However, the job of
an analyst is to make stock market predictions based off additional
evidence. Recently, Vanguard, one of the largest mutual fund companies
in the world, released <a href="https://corporate.vanguard.com/content/corporatesite/us/en/corp/articles/investment-economic-outlook-january-2023.html" target="_blank">its 10-year annualized forecast</a>
for financial markets. Vanguard is estimating only a 4.7% to 6.7%
annual return for large-cap U.S. stocks and a 5.0% to 7.0% annual return
for small cap stocks. So will the stock market achieve its historical
average return over the next 10 years, or is Vanguard correct? Check
back with us in 2033! <br /></p>Stephen A. Ross, Randolph W. Westerfield, Jeffrey J. Jaffe, Bradford D. Jordan, Joseph C. Smolirahttp://www.blogger.com/profile/09769844097171948359noreply@blogger.comtag:blogger.com,1999:blog-2932831402642821660.post-87373675228249375362023-01-11T10:09:00.003-08:002023-01-11T10:09:56.439-08:00It Was In My Other Pocket<p>Have you ever been short on money and gone through your clothes, only to
find a $20 bill that you had forgotten about? We are sure that you were
relieved. The same thing just happened to cryptocurrency exchange FTX,
which filed for bankruptcy back in November.<a href="https://www.marketwatch.com/story/ftx-recovers-5-billion-in-assets-as-the-former-crypto-giant-continues-bankruptcy-process-11673458218" target="_blank"> FTX attorneys announced</a> that the company had found $5 <i>billion</i>
in cash, liquid cryptocurrency, and other liquid investments! Of
course, it appears that there may be other pockets to check as the total
value of missing customer assets is $8 billion. <br /></p>Stephen A. Ross, Randolph W. Westerfield, Jeffrey J. Jaffe, Bradford D. Jordan, Joseph C. Smolirahttp://www.blogger.com/profile/09769844097171948359noreply@blogger.comtag:blogger.com,1999:blog-2932831402642821660.post-83746234855094603572022-11-21T07:39:00.001-08:002022-11-21T07:39:44.561-08:00Liquidity and Bankruptcy<p>As investors have learned, like any other investment, cryptocurrency is
subject to volatility. The recent bankruptcy filing of crypto exchange
FTX shows, this volatility can be extreme. For example, the Ontario
Teachers' Pension plan <a href="https://www.otpp.com/en-ca/about-us/news-and-insights/2022/ontario-teachers--statement-on-ftx/" target="_blank">wrote down $95 million</a>
due to the collapse. As you probably know, bankruptcy occurs when
liabilities are greater than assets. However, bankruptcy can result from
a finer distinction between liabilities and assets, namely liquidity.
In the case of FTX, the company had $8.9 billion in liabilities and $9.6
billion in assets. So was the company forced to declare bankruptcy?
Liquidity. When you <a href="https://www.visualcapitalist.com/ftx-leaked-balance-sheet-visualized/" target="_blank">look at the balance sheet</a>,
FTX had $900 million in liquid assets, $5.5 billion in less-liquid
assets, and $3.2 billion in illiquid assets. Think about it like way:
You owe $10,000 at the end of the week but your only asset is a $100,000
house. Yes, your assets are greater than liabilities, but you likely
won't be able to sell the house and receive the cash for the sale by the
end of the week, so you could be forced into bankruptcy. But FTX had
other problems as well. John Ray, who was appointed to oversee the FTX
bankruptcy and has overseen other large bankruptcies such as Enron, <a href="https://www.theguardian.com/technology/2022/nov/17/ftx-enron-crypto-collapse-john-ray-unprecedented" target="_blank">stated</a> "Never in my career have I seen such a complete failure of corporate
controls and such a complete absence of trustworthy financial
information as occurred here." <br /></p>Stephen A. Ross, Randolph W. Westerfield, Jeffrey J. Jaffe, Bradford D. Jordan, Joseph C. Smolirahttp://www.blogger.com/profile/09769844097171948359noreply@blogger.comtag:blogger.com,1999:blog-2932831402642821660.post-13891237905544055332022-11-11T19:26:00.001-08:002022-11-11T19:26:24.197-08:00It's Bobby Bonilla (Edwin Diaz) Day!<p>The New York Mets famously deferred $5.9 million in salary payable to Bobby Bonilla in 2000, instead paying the former $1.2 million per year from 2011 through 2035. Now, the Amazing Mets are at it again. The team <a href="https://www.espn.com/mlb/story/_/id/35003717/mets-deal-edwin-diaz-deferred-payments-2042" target="_blank">just signed a deal</a> with relief pitcher Edwin Diaz that was announced as a five-year, $102 million contract. Under the terms of the contract, the team will defer $5.5 million per year in 2023, 2024, and 2025, then $5 million per year in 2026 and 2027. In exchange, the team will make annual payments to Diaz through 2042. To complicate matters, there is an option year for 2028 and if the team picks up the option, none of the salary is deferred. It appears that the Mets like really long-term payments! </p>Stephen A. Ross, Randolph W. Westerfield, Jeffrey J. Jaffe, Bradford D. Jordan, Joseph C. Smolirahttp://www.blogger.com/profile/09769844097171948359noreply@blogger.comtag:blogger.com,1999:blog-2932831402642821660.post-86011312188298313022022-11-06T13:14:00.003-08:002022-11-07T13:52:13.926-08:00Furniture Hedging<p>Although many people may not consider sports gambling as a hedge, a <a href="https://www.espn.com/chalk/story/_/id/34964211/mattress-mack-wins-historic-75m-payout-astros-title" target="_blank">Houston furniture store owner</a>
successfully did just that. Jim McIngvale offered purchasers of more
than $3,000 in furniture double their money back if the Houston Astros
won the World Series. McIngvale has offered similar promotions on other
sporting events in the past, but to date, none have worked out for
customers. However, when the Astros won the World Series on Saturday,
McIngvale was obligated to pay customers back. To hedge his risk, his
first bet on the Astros was a $3 million bet in May at 10-to-1 odds. He
added about $7 million more in bets over the summer at average odds of
+750. Because the Astros won the World Series, he received $75 million
from various sports books to offset the refunds payable to customers. </p>Stephen A. Ross, Randolph W. Westerfield, Jeffrey J. Jaffe, Bradford D. Jordan, Joseph C. Smolirahttp://www.blogger.com/profile/09769844097171948359noreply@blogger.comtag:blogger.com,1999:blog-2932831402642821660.post-66326666650418261592022-09-29T15:05:00.001-07:002022-09-29T15:05:30.755-07:00Buying An Annuity<p>While you now know that, in general, an annuity is an equal payment with
a finite number of payments, how do annuities work in the "real world"?
To give you an idea, check out <a href="https://www.schwab.com/annuities/fixed-income-annuity-calculator" target="_blank">Charles Schwab's annuity calculator</a>.
Notice, the website shows three different payment options. The first
option, "For my lifetime (single life)", offers the highest payout per
period. Using a <a href="https://www.investopedia.com/terms/c/commissioners-standard-ordinary-mortality-table-cso.asp" target="_blank">mortality table</a> for annuities, the insurance company estimates the number of payments on the expected life of the <a href="https://www.annuity.org/annuities/annuitant/" target="_blank">annuitant</a>.
If the annuitant outlives their expected life, payments are still made
until their demise. However, if someone signs up for this type of
annuity and dies immediately, no payments are made by the company. The
second option, "For my lifetime and someone else's lifetime (joint
life)", the number of payments are based on the expected number of
payments based on the expected life of both individuals named in the
contract. Again, if either party outlives their expected life, payments
are still made until both parties pass away. Finally, "A set period of
time (period certain)", the number of periods that payments will be made
is fixed when the annuity is first issued. The interest rate used by
annuity issuers in all cases is based of current market interest rates
when the annuity is first issued. <br /></p>Stephen A. Ross, Randolph W. Westerfield, Jeffrey J. Jaffe, Bradford D. Jordan, Joseph C. Smolirahttp://www.blogger.com/profile/09769844097171948359noreply@blogger.comtag:blogger.com,1999:blog-2932831402642821660.post-55205013616217866562022-09-28T11:15:00.005-07:002022-09-28T11:15:51.467-07:00Dollar Strengthens<p>Amid high inflation, rising interest rates, and a faltering stock market, one bright spot has been the <a href="https://finance.yahoo.com/news/why-the-strong-us-dollar-so-strong-134038886.html" target="_blank">performance of the U.S dollar</a>.
Since the beginning of the year, the dollar has risen 17 percent
against the British pound, 25 percent against the Swedish krona and
Japanese yen, and an astounding 40 percent against the Argentinean peso.
Two currencies that have strengthened compared to the dollar are the
Mexican peso and Brazilian real. <br /></p>Stephen A. Ross, Randolph W. Westerfield, Jeffrey J. Jaffe, Bradford D. Jordan, Joseph C. Smolirahttp://www.blogger.com/profile/09769844097171948359noreply@blogger.comtag:blogger.com,1999:blog-2932831402642821660.post-34394799607153859042022-08-30T09:41:00.001-07:002022-08-30T09:41:43.868-07:00EVs Raise Cash<p>EV makers <a href="https://www.cnbc.com/2022/08/30/lucid-and-nikola-file-to-raise-additional-cash.html" target="_blank">Nikola and Lucid</a>
both announced secondary stock offerings today. As we mentioned in the
textbook, SEOs often have a negative effect on stock prices, and these
announcements were not exceptions. Nikola announced a $400 million stock
offering, to be sold at the market price. The stock price dropped about
10 percent on the announcement. For Lucid, the company announced an $8
billion shelf offer to be sold over the next three years. In this case,
the stock "only" dropped about 7 percent. <br /></p>Stephen A. Ross, Randolph W. Westerfield, Jeffrey J. Jaffe, Bradford D. Jordan, Joseph C. Smolirahttp://www.blogger.com/profile/09769844097171948359noreply@blogger.comtag:blogger.com,1999:blog-2932831402642821660.post-74644845525494741032022-08-12T10:42:00.001-07:002022-08-12T10:42:31.545-07:00Chinese Companies Go Dark<p>"Going dark" typically means that a company delists its stock from an exchange. Today, <a href="https://www.marketwatch.com/story/three-chinese-corporate-giants-leaving-ny-stock-exchange-01660305838" target="_blank">three Chinese companies</a>
announced plans to go dark from the New York Stock Exchange. What is
interesting is that the companies will still be listed on the Stock
Exchange of Hong Kong. The reason for delisting from the NYSE is that
American regulators have warned Chinese companies that they would be
forced to leave U.S. exchanges unless they allowed regulators to see the
records of the company auditors. <br /></p>Stephen A. Ross, Randolph W. Westerfield, Jeffrey J. Jaffe, Bradford D. Jordan, Joseph C. Smolirahttp://www.blogger.com/profile/09769844097171948359noreply@blogger.comtag:blogger.com,1999:blog-2932831402642821660.post-59556313216631746982022-08-10T15:16:00.003-07:002022-08-10T15:16:15.357-07:00Stock Repurchase Tax<p>The Senate recently passed the Inflation Reduction Act of 2022. Major
components of the Act include spending on climate change, increased IRS
spending, and measures to lower the cost of prescription drugs. In order
to pass the Act, a last minute change to get the necessary votes was a <a href="https://www.npr.org/2022/08/07/1116190180/democrats-are-set-to-pass-a-major-climate-health-and-tax-bill-heres-whats-in-it" target="_blank">1 percent excise tax on stock repurchases</a>.
As we showed in the text, dividends and stock repurchases affect a
company and investors in much the same way. The tax may push companies
toward dividends, although since the new tax wouldn't take effect until
2023, analysts are expecting large repurchases to be completed by the
end of 2022. <br /></p>Stephen A. Ross, Randolph W. Westerfield, Jeffrey J. Jaffe, Bradford D. Jordan, Joseph C. Smolirahttp://www.blogger.com/profile/09769844097171948359noreply@blogger.comtag:blogger.com,1999:blog-2932831402642821660.post-51013675592004490062022-08-10T15:01:00.002-07:002022-08-10T15:01:09.879-07:00Unexpected Inflation<p>As we discussed in the textbook, stock prices move when unexpected news
comes to light. Economists expected that inflation for July would be 8.7
percent, lower than June's 9.1 percent. Instead, it <a href="https://www.cnbc.com/2022/08/09/stock-futures-tick-up-as-investors-brace-for-july-inflation-report-.html" target="_blank">was announced today</a>
that July's inflation was "only" 8.5 percent. The stock market reacted
dramatically as the S&P 500 jumped about 2 percent and both the
Nasdaq and Russell 2000 jumped almost 3 percent. And for investors in
Disney the <a href="https://finance.yahoo.com/news/disney-earnings-what-to-expect-as-big-strategic-questions-loom-for-media-giant-182433503.html" target="_blank">news was even better</a>:
EPS was $1.09 compared to the $.96 estimate, and the subscriber
addition was 14.4 million streamers versus the expected 10 million. With
the combined market news and company news, Disney stock jumped about 7
percent. <br /></p>Stephen A. Ross, Randolph W. Westerfield, Jeffrey J. Jaffe, Bradford D. Jordan, Joseph C. Smolirahttp://www.blogger.com/profile/09769844097171948359noreply@blogger.comtag:blogger.com,1999:blog-2932831402642821660.post-30758100849524567202022-07-25T13:19:00.001-07:002022-07-25T13:19:22.731-07:00Bobby Bonilla Day<p>Every July 1st is Bobby Bonilla Day! You may not be aware that the now <a href="https://www.espn.com/mlb/story/_/id/34168816/what-bobby-bonilla-day-explaining-why-former-met-gets-paid-119m-every-july-1" target="_blank">retired slugger signed</a>
a contract with the New York Mets in 2000 that deferred his $5.9
million salary in exchange for about $1.2 million per year from 2011
through 2035 on July 1st. And while this is a great payday, Bobby Bo <a href="https://www.si.com/extra-mustard/2022/07/20/bobby-bonilla-day-new-york-mets-contract-auction" target="_blank">recently announced</a>
that he was auctioning off his copy of the famous contract. The package
includes a baseball signed by Bonilla, a game-used bat, a Zoom call,
breakfast and dinner with Bonilla, and attending a Mets game with the
slugger. The starting bid is $10,000, so it looks like he will make even
more money from the contract. <br /></p>Stephen A. Ross, Randolph W. Westerfield, Jeffrey J. Jaffe, Bradford D. Jordan, Joseph C. Smolirahttp://www.blogger.com/profile/09769844097171948359noreply@blogger.comtag:blogger.com,1999:blog-2932831402642821660.post-18101305597823016872022-06-28T12:39:00.000-07:002022-06-28T12:39:00.855-07:00Inventory Spikes<p>During 2021, much of the talk concerning inventory surrounded shortages
due to a variety of factors. In response, many companies increased
production and orders to combat supply chain disruptions and increased
consumer demand coming out of COVID-19 lockdowns. Now, it appears that
companies have overshot demand as inventories have surged. For example,
inventories for global manufacturing companies reached a <a href="https://asia.nikkei.com/Spotlight/Supply-Chain/Manufacturing-inventory-hits-record-1.8tn-worldwide" target="_blank">record $1.87 trillion</a>. As a result, inventory turnover for manufacturers increased to 81.1 days. And <a href="https://www.nbcnews.com/business/business-news/retailers-excess-inventory-mean-big-bargains-shoppers-squeezed-inflati-rcna33750" target="_blank">retailers are no different</a>:
Inventory for Macy's, Target, Walmart and other large retailers has
increased from 17 to 45 percent compared to last year. This increased
inventory is a boon for off-price retailers like Ross and TJ Maxx, which
have a larger supply from big retailers offloading inventory. For many
corporations, the excess inventory will likely negatively impact the
bottom line. <br /></p>Stephen A. Ross, Randolph W. Westerfield, Jeffrey J. Jaffe, Bradford D. Jordan, Joseph C. Smolirahttp://www.blogger.com/profile/09769844097171948359noreply@blogger.comtag:blogger.com,1999:blog-2932831402642821660.post-47431090605966089422022-06-23T11:04:00.001-07:002022-06-23T11:04:55.785-07:00Bad Luck Investing<p>Hopefully you realize that the best time to invest is when stock prices
are low and the worst time is when prices are high. But patience is a
virtue and can have rewards. <a href="https://www.marketwatch.com/story/meet-the-unluckiest-stock-market-investor-of-modern-times-11655830851" target="_blank">A recent article</a>
introduces Betty Badluck, who just happened to invest at the stock
market tops during the past 35 years. So what happened to Betty? As you
will see, while the returns were not fantastic, over time, the stock
market has historically rebounded and she still has three times her
investment in real terms. This is an important note on stock market
history: While we can't predict the future, over the long-term, the
stock market has historically provided positive returns. <br /></p>Stephen A. Ross, Randolph W. Westerfield, Jeffrey J. Jaffe, Bradford D. Jordan, Joseph C. Smolirahttp://www.blogger.com/profile/09769844097171948359noreply@blogger.comtag:blogger.com,1999:blog-2932831402642821660.post-51940801015073957652022-05-09T08:51:00.004-07:002022-05-09T08:51:43.229-07:00TIE Increases<p>As we discussed in the textbook, in general, there is no absolute number
that is best for a particular financial ratio. However, when the
economy is bad or uncertain, it is better if leverage ratios are more
conservative to help avoid financial distress. During the COVID
lockdowns, this is exactly what happened to the <a href="https://www.treasuryandrisk.com/2022/05/05/companies-dramatically-improve-interest-coverage-ratios-during-covid/" target="_blank">times interest earned (TIE)</a>
ratio for most companies. The median TIE increased from 6.1X prior to
the pandemic to 8.6X during the pandemic. This was true even for below
investment grade companies, which showed an increase in the TIE from
2.8X to 4.1X. Given that the cost of borrowing is beginning to rise,
this bodes well for companies.</p>Stephen A. Ross, Randolph W. Westerfield, Jeffrey J. Jaffe, Bradford D. Jordan, Joseph C. Smolirahttp://www.blogger.com/profile/09769844097171948359noreply@blogger.comtag:blogger.com,1999:blog-2932831402642821660.post-16788326421300042892022-05-03T11:16:00.003-07:002022-05-03T11:16:53.656-07:00SEC Sues Vale SA<p>In January 2019, the <a href="https://en.wikipedia.org/wiki/Brumadinho_dam_disaster" target="_blank">Brumadinho dam</a>
in Brazil collapsed, sending a mudflow that killed 270 people. The dam
was built by Vale SA to hold tailings from a copper mine. Now, the <a href="https://www.corporatefinancebrief.com/edition/weekly-cfo-auditing-2022-04-23?open-article-id=21509806&article-title=sec-sues-brazilian-mining-firm--alleging-false-esg-claims" target="_blank">SEC is suing Vale SA</a>,
stating that the company made false claims about the safety of the dam,
obtained fraudulent stability certificates, and regularly misled
investors through its ESG statements. The SEC does not require that
companies file <a href="https://corporatefinanceinstitute.com/resources/knowledge/other/esg-environmental-social-governance/" target="_blank">ESG statements</a>,
but the Climate and ESG Task Force of the SEC is tasked with
identifying false or misleading claims. In other words, consistent with
its other directives, the SEC is concerned about the truthfulness of
statements and disclosures made by a company. <br /></p>Stephen A. Ross, Randolph W. Westerfield, Jeffrey J. Jaffe, Bradford D. Jordan, Joseph C. Smolirahttp://www.blogger.com/profile/09769844097171948359noreply@blogger.comtag:blogger.com,1999:blog-2932831402642821660.post-29544625500975237352022-05-02T12:41:00.001-07:002022-05-02T12:41:06.135-07:00Rivian Lockup To Expire<p>Electric car company Rivian went public on November 9, 2021, which means
its lockup, scheduled for 180 days after the IPO, is scheduled to <a href="https://www.barrons.com/articles/rivian-ipo-stock-price-lockup-51651494868" target="_blank">expire next week</a>.
A lockup prohibits early investors and corporate insiders from trading
the company's stock prior to the lockup expiration. In this case, Ford
and Amazon are two early investors with large stakes in Rivian, but
nether has indicated whether it will sell Rivian shares. A stock price
can often drop significantly after the lockup as large shareholders
attempt to sell shares. However, Rivian is down about 70 percent from
its IPO price, so a price drop after the lockup may not happen. For
example, Meta Platforms and Uber both saw price increases after the
lockup. As the article states, the market is forward looking, so the
potential price drop may already factored into the stock price. <br /></p>Stephen A. Ross, Randolph W. Westerfield, Jeffrey J. Jaffe, Bradford D. Jordan, Joseph C. Smolirahttp://www.blogger.com/profile/09769844097171948359noreply@blogger.comtag:blogger.com,1999:blog-2932831402642821660.post-33491448037914768632022-03-21T10:13:00.001-07:002022-03-21T10:13:09.099-07:00Volatility And IPO Slowdown<p>When a company is undertaking an IPO, surprises are not good. The CBOE
Volatility Index (VIX) is a measure of the market's 30-day expectation
of future volatility. When the VIX is high, the market returns are
volatile, which makes pricing an IPO very difficult. When this happens, <a href="https://www.cfo.com/credit-capital/capital-markets/2022/03/ipo-pricing-vix-cboe-volatility-index/" target="_blank">IPOs slow down</a>.
During early 2022, the VIX has been rising due to uncertainty in both
the global and domestic economies. As a result, the IPO market has
slowed down. In fact, IPOs are only 75 percent of last year's pace. <br /></p>Stephen A. Ross, Randolph W. Westerfield, Jeffrey J. Jaffe, Bradford D. Jordan, Joseph C. Smolirahttp://www.blogger.com/profile/09769844097171948359noreply@blogger.com