Book Value Versus Market Value

Rental car giant Hertz recently filed for bankruptcy. The bankruptcy is for the rental car company, while Hertz Vehicle Financing, which owns and finances the purchases of vehicles, is not included in the bankruptcy. While we will discuss bankruptcy later in the text, this filing does allow us to show the difference between book values and market values, a concept that can cause confusion for students. The 6th full paragraph of an article about the bankruptcy states:  

"A major factor in the timing of the bankruptcy filing was the $389.5 million monthly lease payment that included an additional $135 million "true-up" payment for difference between the depreciated value compared to the book depreciated value."

If you read this carefully, the timing of the bankruptcy was chosen because Hertz car rental could not make the additional payment of $135 million to account for the difference between the book value and market value of the cars it leased from Hertz Vehicle Financing. In other words, the combined market value of the cars leased by Hertz car rental was $135 million less than book value. 

Warner Music's IPO

Warner Music Group has announced that it will continue with its IPO. The company plans to offer 70 million shares at a price of $23 to $26 per share, which would raise about $12.5 billion. An interesting part of the IPO is that all of the funds raised in the IPO will go to current shareholders and the company will receive no cash. Additionally, Access Industries, the current majority shareholder, will retain more than more 99 percent of the voting rights.

Good News For Student Borrowers

If you have a student loan, there is good news. The interest rate on new undergraduate student loans has fallen from 4.53 percent to a record low of 2.75 percent. This means that the monthly payment on a $10,000 loan repaid over 10 years will fall from $103.78 per month to $95.41 per month. For graduate students, the interest rate has fallen from 6.08 percent to 4.3 percent, which will drop the monthly payments on the same $10,000 loan from $111.42 to $102.68.

Pandemic Insurance

One way a company can alleviate risk is through insurance. For example, many companies have business interruption insurance (BII), which is a rider that pays the business owner if an event such as a fire or natural disaster makes it impossible to continue operations. If this happens, BII will pay the owner for lost revenue, an opportunity cost. Even though many businesses carry this rider, pandemics are excluded. For the insurance company, a fire affects few businesses at a time, and the losses are geograhically widespread and somewhat predictable for a large number of insured companies. With a pandemic, business interruptions are concentrated and much more numerous, as we have recently seen. Paying the large number of claims in this situation would bankrupt many insurance companies.

Recently, three major insurers have proposed that the Federal government create a plan to allow businesses to purchase BII that covers pandemic shutdowns. The proposed program would be modeled after the Terrorism Risk Insurance Act, which was enacted after 9/11. A similar program for individuals, which covers flood damage, is available to homeowners. On a personal finance side, we should make sure that you are aware that your homeowners policy will not cover flood damage. A separate policy, offered by the National Flood Insurance Program, must be purchased to cover this type of damage.