Saturday, June 30, 2012

Multiple Regression Using Excel

While we certainly hope that Excel Master helped explain how to estimate a regression equation in Excel, there are definitely more uses for regression equations than CAPM or APT. For a quick look at another use, check out this regression analysis by Excel guru Bill Jelen.

Friday, June 29, 2012

Ethics Swap

Britain's four biggest banks, Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland, have agreed to a settlement over mis-selling swaps to small and medium sized companies. Over 28,000 interest rate products had been sold since 2001. Problems with these products included poor disclosure of exit costs, failure to ensure customers understood the risk of the product, and over hedging. The announcement follows on the £290 million ($453 million) fine levied on Barclays earlier in the weeks for manipulating LIBOR interest rates. RBS and HSBC are still being investigated for LIBOR fixing as well.

Thursday, June 28, 2012

Reverse Synergy at News Corp.?

News Corp. announced that it would split into two companies. The company will spin off its troubled newspaper division, leaving its broadcast division as a stand alone company. In a nod to the possibility of reverse synergies, two investment banks noted that as stand alone businesses, the companies combined value could be between $70 and $77 billion at a time when the combined company is worth about $53 billion.

And here is News Corp. chairman and CEO Rupert Murdoch's explanation of the split and other factors about the split.

Wednesday, June 27, 2012

Should Germany Leave The Euro?

If Germany were to leave the euro zone, the resulting devaluation of the euro could benefit the remaining members of the European Union. A recent op-ed by Kenneth Griffin and Anil Kashyap argues that a German exit from the euro back to the Deutsche mark could be beneficial to all parties in the long run.

Sunday, June 24, 2012

Moody's Downgrades Banks

Moody's downgraded numerous large banks citing exposure to violent swings in the global financial markets. The banks were grouped into three categories. The safest banks have large consumer deposits, lending and credit card business. The second group relies heavily on investment income, and the riskiest group has problems in risk management. In a nod to the efficient markets hypothesis, many banks stock rose after the announcement, an indication that the downgrades had been expected by the stock market.

Thursday, June 21, 2012

Corporate Governance at Mutual Funds

Charles Schwab's YieldPlus bond fund was one of many bond funds that tanked in 2008. One thing that makes this unusual is that fund managers claimed that the average maturity of the fund's holdings was about six months when in actuality it was as high as 2.2 years. A mutual fund's Board of Trustees is designed to protect fund investors, similar to the Board of Director's role as shareholder protector in a corporation, yet some people argue that most mutual fund's Board of Trustees are relatively passive and do little to protect investors. One potential problem raised is that individuals will often sit on multiple mutual fund boards. For example, Fergus Reid III, serves as chairman for all 154 J.P. Morgan mutual funds, while simultaneously serving on the board of 105 Morgan Stanley mutual funds. A telling statement of the apparent lack of power held by a Board of Trustees is evident in the statement by mutual fund manager Donald Yacktman, who said "I've never changed my fees because of pressure from the board." 

Sunday, June 17, 2012

2011 Executive Pay

Despite the recession and Say On Pay, median executive compensation increased about 5 percent in 2011. The largest pay package, an astounding $378 million, was given to Apple's Timothy D. Cook. And David Simon of the Simon Property Group received $137 million last year even though 73.3 percent of shareholders voted against his pay package. Median pay for the 200 top-paid CEOs in 2011 was $14.5 million.

Lease Accounting Answered

FASB and the IASB have agreed to give corporations a choice of two methods to account for leases, the "right-of-use" method or the "whole contract method". The right-of-use method amortizes the value of a lease and basically treats all leases as capital leases. The whole contract method allows the lessee to expense the lease payments equally throughout the life of the lease.

Bank Loan Covenants

Bank loans are an important source of financing for small and mid-sized businesses, but the loan covenants are an important consideration in accepting the loan. Many bank loan covenants are similar to bond covenants. For example, a financial covenant in both can require the company to maintain a minimum current ratio. Since a bank loan is financing obtained from one source, the covenants can often be more restrictive. A recent white paper sponsored by the Small Business Finance Institute discusses common bank loan covenants and the implications.

Monday, June 11, 2012

McWages and PPP

Absolute purchasing power parity states that a good should cost the same no matter the currency. Since labor is a good, it stands to reason that labor should result in the same purchasing power across currencies as well. New research by two economists, Orley Ashenfelter and Stepan Jurajda, examines PPP-adjusted wages across different currencies. By taking the cost of a Big Mac and dividing by the hourly wages paid to a typical McDonald's employee in that country, the result is Big Macs earned per hour. The research show that Western European and Canadian McDonald's workers earn 2.2 Big Macs per hour, while Chinese and Indian McDonald's workers earn only .6 and .4 Big Macs per hour, respectively. These results indicate that absolute PPP does not hold across currencies for labor.

A Trillion Here, A Trillion There

So what happens to corporate debt when it matures? To maintain its capital structure, most companies refinance the maturing debt with new debt. In the next four years, the total amount of debt needed to refinance existing debt as well as fund growth is expected to be $46 trillion combined in the U.S., Euro zone, U.K., Japan, and China. $30 million is expected to be needed to refinance maturing debt, and $13 to $16 trillion needed for growth. China leads the way with $16 to $18 trillion, while U.S. companies will need only $13 to $16 trillion.

Sunday, June 10, 2012

Happy Birthday! Say On Pay Turns 2

For the past two years shareholders have had the ability to vote on executive pay. And although only about 2 percent of executive compensation packages have received a no vote, it appears that there have been changes in those companies that have received a no vote. For example, HP's new CEO, Meg Whitman, has a $1 salary, with much of her pay package based on the company's stock performance. This is the result of the backlash against the former CEO. One factor that does appear to increase the chance of a no vote is poor stock performance over the previous five years.

Negative Net Working Capital

Negative numbers are generally bad, however a recent survey of the communications sector in 2011 found that the best performing companies actually had negative working capital. While negative working capital can be dangerous, especially if liquidity gets tighter, the advantage is that you are actually using other companies' money for free.

Thursday, June 7, 2012

Capital Budgeting and Taxes

Tax credits on renewable-energy are set to expire beginning at the end of 2012, which will likely reduce capital investments in these projects. In fact, one analyst notes that wind projects have already slowed down since a project begun now could not be completed by the end of the year and capture the tax break. Obviously, the tax credits are an important cash flow to these renewable-energy projects. The article also states that before the recession, solar facilities earned a 6 to 8 percent aftertax IRR, while the current aftertax IRR is more than 10 percent. A question: Since the article states an aftertax IRR, is this any different than the IRR calculated in the textbook?

Wednesday, June 6, 2012

But It Is Only $3.6 Million Per Year

Last month, LightSquared, Inc., filed bankruptcy. In any bankruptcy, there are numerous court filings, including the costs associated with the bankruptcy. In a recent filing, it was disclosed that the cost per hour for former Solicitor General Theodore Olson to work on the bankruptcy was a staggering $1,800. Fortunately, David Fotouhi, an associate at the same firm, was only charging $445 per hour.

Monday, June 4, 2012

Diversify Your Portfolio With Gold?

If you want a diversified portfolio, you need to find the correlation between the assets in your portfolio. Historically, gold has been believed to be a diversifying asset as it can often have a negative correlation with other assets, a fact that is true....sometimes. Over the past five years, the correlation between gold and 10-year U.S. Treasuries has been as low as -0.8, but also as high as 0.6. Similarly, the correlation between gold and stocks has been as high as 0.9. This reinforces an important point when using correlation or other statistics like beta: While we can easily find historical values, what we really need are the values going forward.

Lawyers, Guns, and Mergers

One factor in mergers that has been growing in recent years is lawsuits. A recent survey found that 96 percent of U.S. mergers in 2011 valued over $500 million resulted in a lawsuit. In fact, there were an average of 6.2 lawsuits filed per merger during the year.