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 recent article
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.
Fundamentals of Corporate Finance
Thursday, June 23, 2022
Bad Luck Investing
Monday, May 9, 2022
TIE Increases
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 times interest earned (TIE) 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.
Tuesday, May 3, 2022
SEC Sues Vale SA
In January 2019, the Brumadinho dam
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 SEC is suing Vale SA,
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 ESG statements,
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.
Monday, May 2, 2022
Rivian Lockup To Expire
Electric car company Rivian went public on November 9, 2021, which means
its lockup, scheduled for 180 days after the IPO, is scheduled to expire next week.
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.
Monday, March 21, 2022
Volatility And IPO Slowdown
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, IPOs slow down.
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.
Tuesday, March 15, 2022
NPV Analysis
It is always interesting to see a real-world application of concepts you have learned in class. Recently, Voyageur Pharmaceuticals Ltd. released the results
of its capital budgeting analysis of a barium sulfate project in
British Columbia, Canada. Notice the company repeatedly refers to the
project NPV, but also calculates the IRR and payback period. The report
includes the key variable assumptions and the NPV per share. What we
also find interesting is the sensitivity figure near the bottom of the
article. The company shows the sensitivity of the project to changes in
operating costs, revenue, and capital. It appears that the NPV of this
project is most sensitive to changes in revenue.
Century Bonds Issued
With the threat of an increase in interest rates, it appears to be a
good time for borrowers to lock on interest rates for a long time. TTUN
is the latest to do so, issuing $1.2 billion
worth of century bonds, that is bonds with a 100-year maturity, at a
coupon rate of 4.45 percent. At the same time, TTUN issued $800 million
of 30-year maturity bonds at 3.5 percent. Other Big Ten universities,
including the University of Minnesota, Michigan State University,
Rutgers University, and THE Ohio State University have issued century
bonds in recent years.