Tuesday, February 2, 2016
Capital expenditures are affected by many factors, including corporate profits and sales. The recent drop in oil prices has caused a sharp drop in capital expenditures by oil companies. For example, BP dropped its capital expenditures for 2015 to $18.7 billion, significantly below its planned capex of $24-$26 billion. ExxonMobil dropped its 2015 capex by 25 percent to $23.2 billion, and Anadarko plans to drop its capex for 2016 to one-half of its initial budget.
As we mentioned in the textbook, companies often want and need to hedge exchange rate risk. A recent article in Treasury and Risk gives a good primer on methods to hedge exchange rates. First, a company must have an accurate forecast of foreign cash flows. With any forecast, GIGO (garbage in, garbage out) applies to hedging exchange rates. If the forecast is inaccurate, the company will over hedge or under hedge its exchange rate risk. Another suggestion made in the article is a layered hedge, which may help to reduce volatility. This means that a company does not hedge all of its exchange rate risk at a particular point in time, but rather hedges part of the expected exchange rate risk, then adds to the hedge over time as the date of the currency exchange approaches. If you are interested in hedging exchange rates, we suggest you read further.
Monday, February 1, 2016
Students (and a lot of investment professionals) think that timing that market, that is leaving the stock market before it goes down, is a good strategy. And while we would like to sell our stocks before a price drop, it is easier said than done. A recent article highlights the danger of missing the good days in the stock market. Fidelity Investments calculated the return from investing $10,000 in the S&P 500 from January 1, 1980 through March 31, 2015. If you were invested every day, your portfolio balance would have grown to $503,741. However, if you missed the five best days in the market, your balance would have been about $309,431, a 40 percent decrease! Missing the 50 best days would have dropped your portfolio balance to $41,803, or about eight percent of the value of being invested every day. There are about 252 trading days per year, so missing 5 days (or 50 days) out of about 8,800 days can have a serious impact on the value of your investments.
A recent survey by EY indicates that corporate divestitures are expected to increase in the next two years. Forty nine percent of the companies surveyed indicated possible divestitures in 2016, and only five percent of companies did not plan a divestiture over the next two years. Seventy percent of the companies that are planning a divestiture expect to reinvest in core businesses, invest in new products and markets, or make an acquisition. Divestitures have proven to be a method to increase shareholder wealth in recent years as companies that have divested more than 10 percent of their value have outperformed the stock market by more than six percent.
Thursday, January 28, 2016
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
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.