Sunday, September 25, 2016

Monster Write-off

Usually with a new project, a company will wait until after the project has begun to determine if the project will be successful or not. With the Paramount pictures movie Monster Trucks, the company decided that it had it had a monster flop on its hands. The movie, which has been in development since 2013, reportedly cost $125 million. Even though the movie won't be released until January 2017, Paramount announced that it would write off $115 million related to the movie. Write-offs due to poor box office receipts usually occur after a movie is released, but the move is not unprecedented. For example, in January 2015, DreamWorks wrote off $155 million due to unreleased films, which is the option to abandon. Whether Monster Trucks is ultimately released will help determine if the remaining development costs are written off.

Wednesday, September 21, 2016

Microsoft Pays Shareholders

Microsoft announced that it was raising its dividend by 8 percent and would buy back an additional $40 billion in shares after the company concludes its current $7.1 billion buyback, which is left from the company's previous $40 billion buyback. The buyback amounts to about 9 percent of outstanding shares, although because of the company's ESOP, the number of outstanding shares will be reduced by less than that amount. The dividend increase means that Microsoft is allocating nearly $1 billion more toward dividends this year than last. Total dividends paid by Microsoft this year should top $12 billion.

Corporate Overseas Cash Grows

The cash held by foreign subsidiaries of U.S. companies has reached a record $2.5 trillion. Microsoft and GE both hold more than $100 billion overseas, while Apple and Pfizer have $91.5 billion and about $80 billion, respectively. Overseas cash now tops cash held domestically, which reached $1.94 trillion. Of course, much of the reason for the foreign cash holdings is the U.S tax system, which taxes repatriated earnings at 35 percent, the highest corporate tax rate in the world. Although various tax breaks on the repatriation of cash have been floated, naysayers argue that the last repatriation tax break in 2004 resulted in little investment. Rather, repatriated cash was used for dividends and stock buybacks. We should point out that a repatriation tax break would actually be a boon to the IRS. Consider, if the repatriation tax rate were lowered to 15 percent, companies would only get $.85 for every dollar repatriated. Assuming a 35 percent personal tax rate, investor would only receive about $.55 in dividends after tax per dollar repatriated, an effective tax rate of about 45 percent.

Monday, September 12, 2016

Ethics And Legislation

Unfortunately, most legislation is the result if unethical behavior. As part of the Sarbanes-Oxley Act, the SEC passed Rule 13a-14 that said CEOs and CFOs are required to sign and attest that the financial statements filed with the SEC do not include material misstatements or omissions. In 2013, a judge found that the CEO and CFO of Basin Water were not liable for sham transactions since they were not directly involved in the transactions. The 9th U.S. Circuit Court of Appeals recently overturned this decision and stated that "a mere signature is not enough for compliance" and is allowing the SEC to sue for disgorgement of gains. The recent ruling makes it even more important for CEOs and CFOs to run ethical companies.

Wednesday, September 7, 2016

Accounting Cash Flow Makeover

The Accounting Statement of Cash Flows received a makeover as FASB updated the treatment of eight different cash flows. As you will read, whether the updates provide any meaningful change is not clear, as two Accounting professors interviewed have differing opinions on the update. Unfortunately, FASB did not address what we feel is a glaring weakness in that interest expense is still considered an operating cash flow, rather than being included correctly in the financing cash flow section.

Friday, September 2, 2016

Currency Trading Shrinks...Maybe

So how much currency do you think is traded daily? According to a recent report published by the Bank for International Settlements (BIS), average daily trading in April 2016 was about $5.1 trillion! This was down from $5.4 trillion per day in April 2013. However, if the dollar had not appreciated over the period, average daily volume would have risen about 4 percent. Spot currency trades were about $1.7 trillion per day, swaps accounted for about $2.4 trillion per day, and the rest of the trading was for other over-the-counter foreign currency derivatives. The U.S. dollar was on one side of 88 percent of trades, while the euro was on 31 percent of trades.

Tuesday, August 23, 2016

Negative Yield Triangular Arbitrage

A question we often get is if the material we discuss is actually relevant to the real world. However, we can see the application of triangular arbitrage with the seemingly strange desire of investors to purchase the $9 trillion in below zero interest sovereign debt. A Japanese 3-month government bill is currently returning about negative .24 percent. The buyer can borrow at the yen 3-month LIBOR, which is about negative .02 percent and receive the dollar LIBOR at .82 percent. The buyer then executes a yen-dollar swap, which results in a dollar-hedged yield on the trade of 1.24 percent. With the 3-month U.S. Treasury yield about .25 percent, and increase in annualized return of about one percent is a huge increase for portfolio managers.