“Comment, question or quotation of the day”

16-05-2018 : Quote of the day

  “Cash is Truth” 

15-05-2018 : Question from a reader

WeWork's high yield debt has lost 5% in one week.
 If Entreprise Value = Value of Debt + Value of Equity and if Debt Value decreases ...:
 - either Entreprise Value decreases too, and the equity value decreases.
- but if Entreprise Value remains stable, does this mean that the equity value is increasing?
 There is something that I don’t understand ...

There are only 3 possible reasons for the decrease in the value of a company's debt:

- Either interest rates in the economy jumped sharply.

- Either the shareholders have made decisions which despoil the interests of lenders, such as paying a massive dividend that significantly weakens the solvency of the company.

- Or, and this is by far the most frequent case so much the second is unlikely in our time and in our far-off lands of the Far West of the 19th century: investors have revised downward their expectations of free cash flows generated by the company, for example following a result publication, and they think that the value of the entreprise value has decreased as a result. In this case, the equity value will have fallen even further, since equity is riskier than debt.

Have a nice day


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The Vernimmen.com Letter

Number 113 of May 2018

News : Would L'Oréal be right to acquire Nestlé's stake in its share capital?

Statistics : Worldwide corporate income tax rates

Research : Maturity and the cost of bank loans

Q&A : What are financial synergies?