“Comment, question or quotation of the day”

14-12-2017 : “Quote the day ”

"Selling is good. Getting paid is better." Proverb

13-12-2017 : “Question from a Facebook follower ”

  It is a start-up in the field of research that carries out the popularization of scientific articles on behalf of publishers or large groups. The company issues 10,000 shares for 15% of the capital, their issue price is € 283. I am about to invest € 10,000 because I believe in business but I would like to be sure that the issue price is consistent. What questions to ask for this? If the company is a real start up with just 1/2 years of activity, the proposed price is staggering because if this company issues 10,000 shares for 15% to 283 € the action means that the company is looking to to raise € 2.83 million, which is important at this stage, for a pre-money valuation of 10,000 / 15% x 283 - 2.8 M = €16 million, which is 3 to 6 times higher than usual for a company at this stage of development. For more see chapter 40 of the Vernimmen. Have a nice day  

13-12-2017 : “Atos offer on Gemalto ”

  With a share price increasing from €20 to €80 between early 2008 and mid 2014, Gemalto has been both an industrial and a stock market success story. Then the successful machine has stopped with, in recent quarters, 4 successive warnings on the results and a price that has fallen gradually since mid-2015 to €33 before yesterday. On the contrary, Atos saw its share price increases from €35 in 2008 to €125 yesterday, witnessing a very successful organic and external growth strategy. With a full cash offer of €46, a premium of 44% on the last price, but 0% on the Gemalto prices of mid August before a new warning on the results, there is no doubt that Gemalto will lose its independence. The only question left is who will be its buyer. By setting the price of Gemalto yesterday at €45.6, just below Atos' offer at €46, investors say they do not believe in the possibility of a counter-offer more advantageous for them. Dura lex sed lex. Have a nice day.  

12-12-2017 : “Quote of the day ”

"The richer you are, the harder it is to know how much you are worth." Felix Dennis, a British multimillionaire

11-12-2017 : “Question from a Facebook follower ”

I have to value an industrial company that will make a big investment for the launch of a new factory from 2022 that will replace the current plant. The investment in the coming years (from today to 2021) is so heavy that the company has significant negative free cash flows that are not compensated by the activity in the current premises and are slightly compensated by the terminal value. Even by making a cash flow fade over the next few years, this does not bring out with a positive valuation. Should we do some corrections? Which valuation approach would you adopt in such a situation?   Have you take into account the resale value of the current plant once the new plant is operational in your flows?   Check your calculations again.   If your flows do not change, it means that this new plant is unprofitable and likely to sink the company. It may be necessary to ask the question of the relevance of this investment rather than the valuation of this company.   Have a nice day.  

08-12-2017 : “Question from one of our readers ”

What is the difference between refinancing and restructuring a debt?   The refinancing of a debt is simply the issuance of a new loan to finance the repayment of the previous loan in due time.   The restructuring of a debt is the modification of the terms of an existing debt: duration, interest rate, covenants,  because the company can not cope in time with the deadlines of this debt, or because the situation of the company or the loan market has improved and the company wants to take advantage of it (lower interest rate, possibility of going into debt over longer terms, less stringent covenants, etc.) to improve the conditions of its debt. Have a nice day.   Have a good day.

06-12-2017 : “Question from one of our readers ”

  If I raise €1m from investors, and these €1m are wired at once, but are not spent at once, rather progressively in the project, is the C0 (flow initial) in the NPV or IRR equation corresponds to the amount given to me at once (€1m)? When calculating the NPV for the investor, you must take into account the investor's investment at the moment when the investor wires the funds, whether the company uses these funds immediately or later is of no importance. If the company does not need the money right away, it penalizes the NPV and the IRR of the investor. This is why investment funds usually require an investment commitment from investors and call the funds as they invest them, so investors do not have to wire money that will be stay idle on a bank account. Investment funds may even differ calling investors for liquidity for a few months by getting into short term debt to make investments while waiting to call the funds of investors. (See the letter Vernimmen.net n ° 97 of October 2016). Have a nice day.  

04-12-2017 : “Question from a reader ”

What is the impact of the outsourcing of some of the businesses of the company on its cost of capital? Especially in the automotive industry, with OEMs?
In general, outsourcing reduces the cost of capital because it transforms fixed and variable costs into only variable costs. If the company has less fixed costs, it will be less sensitive to the economic situation and therefore its beta and its cost of capital will be lower (see section 18.5 of Vernimmen).
That said, the experience of 2008 showed that if the supplier goes bankrupt, the car manufacturer is in a very bad situation because in general it has a limited number of suppliers. It is therefore obliged to help it, at least temporarily, to avoid being no longer supplied. Outsourcing in this extreme context is therefore a little illusory.
Have a nice day.

01-12-2017 : “Quote of the day ”

"Beware of small differences between large numbers." Adage

30-11-2017 : “Question from one of our readers ”

Is it relevant to compare the expenses of an income statement by nature to production rather than turnover? This is fair for income statements presented by nature, since the expenses of this income statement are the expenses corresponding, not to the turnover (products sold), but to the production (products that have been produced), with a regularization through inventory changes to fall back on an operating result which corresponds well to the difference between the turnover and the cost of the products sold (and not only produced). For more details, see Chapter 3 of Vernimmen ).
Have a nice day

29-11-2017 : “Quote of the day ”

"If you see a Swiss banker jumping out of a window, then jump out after him. There must be money in it." Voltaire

28-11-2017 : “Answer to yesterday's brainstorming problem (mentioned at the end of this post) ”

  The decisions for which A's agreement is required are the most important decisions for a company. They can only be taken if A and B agree. Therefore A and B are in joint control over X. For more details, review chapter 6 of Vernimmen 2018. The problem A holds 49.5% of X of which the remaining 50.5% are held by B. A is represented on the board of X by 2 directors and B by 3. The decisions of the board of directors are taken by a simple majority except for the approval or the modification of the budgets or the business plan, for the investments and the financings, for the acquisitions or disposals not envisaged in the business plan. , and for appointments and dismissals of officers, decisions for which A's agreement is required. Is A in a position of joint control or significant influence over X?  

27-11-2017 : “Brainstorming ”

  A holds 49.5% of X of which the remaining 50.5% are held by B. A is represented on the board of X by 2 directors and B by 3. The decisions of the board of directors are taken by a simple majority except for the approval or the modification of the budgets or the business plan, for the investments and the financings, for the acquisitions or disposals not envisaged in the business plan, and for appointments and dismissals of officers where the approval of A is requested. Is A in a position of joint control or significant influence over X? See you tomorrow for the answer. Have a nice day.  

24-11-2017 : “Quote of the day ”

"If you're not prepared to hold a share for ten years, you shouldn't hold it for ten minutes." Warren Buffett

23-11-2017 : “Question from one of our readers ”

When a company has cash that is restricted, for example, as a collateral on a loan, do you consider it as cash in the net bank and financial debt calculations? And for the liquidity ratio? In the liquidity ratios, it must be excluded because this cash is blocked as a collateral for a credit elsewhere. It can not serve twice. For net debt, it is necessary to be consistent and take this restricted cash into account since it is a partial counterpart of a bank or financial debt. Have a nice day

22-11-2017 : “Quote of the day ”

"God doesn't play dice." Albert Einstein

21-11-2017 : “Question asked during a recruitment interview for a financial analyst position ”

What is the relationship between the profitability and solvency of a company?
There is a definite correlation between the two, although it is not absolute. Indeed, if a company is profitable, that is to say if it generates a return on capital employed above its cost of capital, its assets will have a certain value and probably higher than their carrying value for which they appear on its balance sheet. In addition, its profitability will enable it to generate positive net results that will allow it, except if it distributes them in full as dividends, to reinforce the share of its equity in the balance sheet and thus improve its solvency.
For more details, read or reread Chapter 14 of the Vernimmen.
Have a nice day

20-11-2017 : “Quote of the day ”

"It is the size of the pizza that matters, not how many slices you cut it into." Merton Miller

17-11-2017 : “Salvator Mundi ”

Imagine that Leonardo da Vinci sold his work to Louis XII and his wife Anne of Brittany who had ordered it to celebrate the taking of Milan for € 100,000 at the time, which does not seem expensive given his already high reputation at the time.
Capitalized at 1.64% per year, you find at the end of 507 years (one estimates the date of realization of the work between 1506 and 1513),. . . $ 450 million, i.e. the price paid yesterday.
First conclusion: at $ 450M, and even if we did not participate in the auction that started at $ 70M, the buyer does not seem to be a bad deal for the only one of the 15 paintings by Leonard de Vinci that is not in a museum.
Second conclusion: Be wary of long-term capitalizations that ignore wars, revolutions, inflationary flares, changes of tastes and other scourges.
Third conclusion: Going to the Louvre in Paris and Abu Dhabi, you will see 5 paintings by the master, including the wonderful Madonna and Child with Saint Anne. It There is more in life than just finance!
Have a nice day

16-11-2017 : “Question ”

An experiment was recently carried out where a child, an astrologer and a financial analyst were each given €10,000 to invest for eight years. Who do you think achieved the best results? The child. If markets are really efficient, the answer is completely random.  For more, see chapter 15 of the Vernimmen.

15-11-2017 : “Solution to the problem of yesterday ”

Yesterday's brainstorming problem is reminded at the end of this post A can not make decisions alone, he only has blocking power. He is not in exclusive control. There is no shareholders' pact; several combinations of shareholders are possible to reach the majority with A or without A. There is therefore no joint control of A on B. It simply has a notable influence on B, which it will have to consolidate by equity method. If you want to review your consolidation techniques, chapter 6 of Vernimmen 2018 is for you. Have a good day A holds 42% of B whose shareholders' balance consists of investors each holding between 1.6% and 14.5% of the capital. A is represented on the board of directors by 5 directors out of 12. There is no shareholder agreement or agreement between A and B. A 2/3 majority is required for key decisions: budget, significant investments, acquisition. A is in a situation of exclusive control, joint or in significant influence over B, in view of the consolidation rules set out in Chapter 6 of the Vernimmen.

14-11-2017 : “Brainstorming ”

A holds 42% of B whose shareholders' balance consists of investors each holding between 1.6% and 14.5% of the capital.
A is represented on the board of directors by 5 directors out of 12. There is no shareholder agreement or agreement between A and B. A 2/3 majority is required for key decisions: budget, significant investments, acquisitions.
Is A in a situation of exclusive control, joint control or in significant influence over B, in view of the consolidation rules set out in Chapter 6 of the Vernimmen?
We will give the answer tomorrow
Have a nice day

09-11-2017 : “Question from one of our reader ”

When a company has cash that is restricted, for example, as a collateral on a loan, do you consider it as cash in the net bank and financial debt calculations? And for the liquidity ratio?   In the liquidity ratios, it must be excluded because this cash is blocked as a collateral for a credit elsewhere. It can not serve twice.   For net debt, it is necessary to be consistent and take this restricted cash into account since it is a partial counterpart of a bank or financial debt.   Have a nice day  

07-11-2017 : “Quote of the day ”

From what we can identify, the only reason today people buy or sell Bitcoin is to make money, which is the very definition of speculation, and the very definition of a bubble. It has no use.

06-11-2017 : “The misfortune of Altice ”

Its share price collapsed by 22.6% on Friday lowering its market capitalization from €21.9bn to €16.9bn. All this for quarterly results 1.8% below expectations both in terms of sales and gross operating surplus.
Excessive do you find? Remember that for a highly indebted company like Altice - its net bank and financial debt totals € 50.1bn, or 5.3 times the 2017 EBITDA - the leverage effect also applies in value. The 22.6% fall in the value of Altice's equity corresponds to a fall of only 7% in the value of its entreprise value. This is because the value of the debt remains constant, which increases at the level of equity the decline in the entreprise value.
Have a nice day  

02-11-2017 : “Question asked during a recruitment interview for a financial analyst position: What is the relationship between the profitability and solvency of a company ”

Do shareholders and lenders carry out financial analysis in the same way? Yes, because a company that creates value (for shareholders) will be solvent (for lenders).  For more, see chapter 8 of the Vernimmen.

01-11-2017 : “Quote of the day ”

Having money means having all possibilities in your hand. Lacking money means remaining a prisoner of an eternal present, hindered by your own needs. Pascal Bruckner

31-10-2017 : “Question asked during a recruitment interview for a financial analyst position: What is the relationship between the profitability and solvency of a company ”

There is a definite correlation between the two, although it is not absolute. Indeed, if a company is profitable, that is to say if it generates a return on capital employed above its cost of capital, its assets will have a certain value and probably higher than their carrying value for which they appear on its balance sheet. In addition, its profitability will enable it to generate positive net results that will allow it, except if it distributes them in full as dividends, to reinforce the share of its equity in the balance sheet and thus improve its solvency.
For more details, read or reread Chapter 14 of the Vernimmen.
Have a nice day

30-10-2017 : “Quote of the day ”

Whoever condemns money condemns people to servitude and is the accomplice of their downtrodden condition. Pascal Bruckner

27-10-2017 : “How do you explain that a company can have an entreprise value greater than the book amount of its operating assets, while its return on capital employed is lower than its cost of capital? ”

  This means that the market sees more than the tip of his nose! That is, investors anticipate that the ROCE of this company will improve in the years to come and exceed the cost of capital. Remember that ROCE is only valid for the year for which it is calculated, whereas the entreprise value takes account of all future free cash flows generated by the operating assets.   Haven nice day  

26-10-2017 : “Quote of the day ”

Today's economic agent is swimming in irrational waters with a few moments of lucidity, when he or she takes the time to think. Dominique Fiers

25-10-2017 : “Question ”

When a company is listed on the stock market, shareholders bring in equity that I would call "new". But what happens to the equity already held by the company before the IPO: is this converted into shares? The IPO of a company can be done in two ways, or by a mix of these two ways:
Either the company proceeds with a capital increase by issuing new shares that are sold to investors who become shareholders of the company on that occasion. The company gets the proceeds of the share issue and increases its equity in the balance sheet for the same amount.
Either the current shareholders sell existing shares to investors who become shareholders of the company on that occasion. In this case, the company's balance sheet is not changed.
In any event, the equity of the company, whether listed or not, is made up of shares and the IPO does not change this situation. Simply with the IPO, these shares are listed and potentially sellable or very easily buyable.
Have a nice day.

24-10-2017 : “Quote of the day ”

"Every day I see a whole host of investment opportunities unfolding before me and my only problem is to distinguish the good ones to be seized from the bad ones to be shunned."  Antoine Riboud

23-10-2017 : “Question ”

When we calculate the pay out ratio, should we compute:   (dividends paid + share buybacks) / net income   or rather   (dividends paid + share buybacks - share issues) / net income   Yes for the second possibility if the capital increases are only the result of the exercise of stock options, which dilutive effect is often neutralized by making share repurchases for the same amount.   Have a nice day.  

20-10-2017 : “Citation du jour ”

"L'économie est le seul domaine où deux personnes peuvent se partager le prix Nobel en ayant affirmé des choses opposées (Myrdal et Hayek)." Roberto Alazar

19-10-2017 : “Can the equity market risk premium be negative? The Financial Times has written that over the past 130 years, it has been negative about one in four times. ”

  We love the FT to which one of us has subscribed since the age of 19. Yet on this point, we do not agree with them. In fact, they calculated the market risk premium by computing it as 1 / PE ratio - risk free money rate. This assumes that the value of a share is determined by Gordon Shapiro's method V = pay-out ratio x EPS / (k-g) This assumes that the future growth rate, g, is constant. This is not always true, and even often false. Therefore, based on a practical but false methodology (quick and dirty), it is not surprising that the results quoted by the FT are false. In fact, when you use a methodology that is correct, but much more complex to implement, you will find very very rarely negative equity risk premiums. For example, since 1986, the starting date for the European and American risk premium graph that we give in Chapter 19 of the Vernimmen, none of the risk premiums is negative. The proportion quoted without the FT is therefore completely false. Have a nice day.  

18-10-2017 : “Citation du jour ”

"Si vous prenez de l'argent dans votre poche droite pour la mettre dans votre poche gauche, vous n'êtes pas plus riche pour autant." Merton Miller

18-10-2017 : “Quote of the day ”

Whoever condemns money condemns people to servitude and is the accomplice of their downtrodden condition. Pascal Bruckner 

17-10-2017 : “How long has PwC audited the accounts of Goldman Sachs? ”

  For 91 years, since 1926, sic. Certainly it can be assumed that it is no longer with the same members of PwC. . . As for Wells Fargo, it has been 86 years since it was faithful to KPMG (since 1931), a recent auditor of Citigroup, for only 48 years (1969). Deloitte is a bit new to Morgan Stanley (20 years since 1997). This could change under influence. . . of European regulations which impose a change every 20 years and to open the auditors' mandate to competition at least every 10 years. This is rather healthy, at least in principle, to have an outside look that changes regularly and a competition that can play truly. The most virtuous countries in governance are not always those who claim to be. Have a nice day  

16-10-2017 : “Report sine die of the Aramco IPO? ”

  This is what the Financial Times thinks and it is not a huge surprise. Which investor, in a pure financial logic, would like to become shareholder of a group with a small free float (5 to 10%), alongside an undemocratic state with decision-making processes at least opaque and with a monstrous conflict of interest because of the oil tax, by far the first resource of Arabia? Not to mention a sector which, due to the energy transition, may have to leave a significant part of its assets in the ground forever. Last but not least, the difficulty of carrying out a process of making Aramco a truly independent public company offering normal guarantees of internal governance and reporting at a point in the stock market cycle of which we take no great risk to say that it is more close to its end than its beginning. Have a nice day.  

13-10-2017 : “Is it necessary or not to put the real estate business in the company to sell it? ”

It is up to you to see whether the selling shareholders want to keep the operating real estate on their own and to invoice the operating company for rents, providing them with some income at the risk of losing one day the tenant and have to find another, or even have to redeploy the building to bring it into line with the needs of a new tenant that may be different from the previous tenant.
It also depends on whether or not the buyer wants to own the operating property. Sometimes the inevitable price increase of the company owning its real estate can make it more difficult for a buyer to buy, and you lose in competitive intensity in the sales process, or you may even lose your only buyer.
The last chapter of the Vernimmen coming edition is devoted to the financial management of real estate operating assets.
Have a nice day

12-10-2017 : “Quote of the day ”

"Money ...... is the oil which renders the motion of the wheels [of trade] more smooth and easy." David Hume

11-10-2017 : “How to value a company that owns its operating real estate assets by using the multiple method? ”

  Using the opco propco method which is set out in the last chapter of the new Vernimmen devoted to the financial management of operating real estate assets. It assumes that the company is divided into two parts: an operational part (opco) which leases the operating property from the other part, the property part (propco), at a market price. The value of your company's equity is then the sum of the equity value of the two parties. For the operational part, its EBITDA is reduced by the rent it pays (usually fictitiously) to the real estate part. To find its entreprise value, you must multiply its EBITDA by the multiple of EBITDA of comparable companies that do not own their operating real estate assets. You then subtract net bank and financial debt (excluding the share that finances real estate, if there is one). If the comparables differ by their real estate policy, some owning the real estate, others leasing it, you must use multiples of the EBITDA before rent (the EBITDAR) that you apply to the EBITDAR of the opco part. For the real estate part, you value real estate on the basis of an appraisal / sales price per square meter and you deduct the real estate debt to obtain the value of the equity. The value of your company's equity is then the sum of the equity values ​​of the two parties. More in the last chapter of the new edition of the Vernimmen which has just been published. Have a nice day.  

10-10-2017 : “Quote of the day ”

"Every day I see a whole host of investment opportunities unfolding before me and my only problem is to distinguish the good ones to be seized from the bad ones to be shunned."  Antoine Riboud

10-10-2017 : “Richard Thaler, 2017 Nobel Prize for Economics ”

Behavioral finance is thus rewarded through one of its pioneers. Even if its applications in corporate finance are limited to this day, behavioral finance has figured prominently in the Vernimmen for years (chapter 15 for those who would have forgotten).
It will be noted that he teaches in Chicago like Eugene Fama, designer of the theory of efficient markets and Nobel Prize in 2013 for views very different from those of Richard Thaler. A demonstration of how academic freedom within the same institution is a real source of wealth.
Michael Jensen has not (yet) received the Nobel Prize (for his work on agency theory and governance) among the founding fathers of today's finance.
Have a nice day.

09-10-2017 : “I do not understand the concept of beta of debt. ”

  To simplify, one can say that when one is a shareholder of a company, one runs two risks: the risk of its economic activity and the risk of its financial structure which results from the choices that it made to finance itself with more or less debt. While it may be assumed that the risk of a firm's business is virtually the same for all firms operating in a given industry, the risk of the financial structure differs as from one business to another just like their different financial structures. In other words, the beta of equity (or the beta of the shares of a company that is synonymous) depends on the risk of the operations that runs this company in relation to the average risk of the economy in general and the risk of its financial structure (which depends on the level of debt in the financing of assets). To calculate the unlevered beta is to find within the beta of the stock, the share due to the operating risk by setting aside the part of risk due to the financial structure of the company. In other words, it is calculating what would be the beta of the shares of this company as if it had neither debts nor net cash. Hence the term unlevered beta. Indeed, if the company has zero net debt, the beta of its equity (or that of its shares which is synonymous) corresponds only to the risk of the operating activity or the risk of its operating assets. It is therefore the beta of the operating asset. If the equity beta measures the sensitivity of a share's value to market fluctuations, the beta of operating assets (the unlevered beta) measures the sensitivity of fluctuations in the value of the operating assets relative to market fluctuations. Have a nice day  

06-10-2017 : “Quote of the day ”

History has shown that control divorced from consequence will end badly. Some shareholders from Facebook

05-10-2017 : “Question ”

What problems arise when measuring financial equilibrium? That’s a tough question as there is no equilibrium in the true sense of the word in corporate finance. As Modigliani and Miller have shown, there is no optimum financial structure (split of financing of capital employed between debt and equity). All financial structures have their place and whether they are acceptable or not depends only on the level of risk that the shareholders are prepared to run. A highly geared company will thus be more profitable, all other things being equal, than a company without debts, but it will also carry more risk. Neither situation is better than the other – they are simply equivalent with different risk/reward ratios.
In the short term, we could describe financial equilibrium as the ability of a company to meet its debts at all times. It’s thus essentially a liquidity problem.This will depend on:
- the amount of short term liabilities relative to the amount of short term assets – if you have short term liabilities of 10, and short term assets of 7, and you cannot either reschedule your debts or raise new funds, you may as well file for bankruptcy.  
- how quickly your assets become liquid and how soon you have to pay off your debts. This information is not made public and external analysts are hard pressed to estimate it. Internally, it’s the ABC of any finance director’s key indicators.  For more information, see chapter 35 of the Vernimmen.

04-10-2017 : “Quote of the day ”

Avarice starts where poverty ends Balzac

03-10-2017 : “Solution to the problem of yesterday ”

When you buy an investment project at its net present value, and if the actual flows are in line with forecasts, your IRR is by construction the discount rate used to calculate the net present value, i.e. 6% in our example. And the net present value of the investment of buying the right to make an investment at a price equal to the net present value of that investment is of course zero. This does not mean that you have destroyed value; it means that you have earned the cost of capital of the investment, neither more nor less.
The idea is that the NPV represents not only the value created by an investment, but also the additional price that one could pay to make the investment while being adequately remunerated in relation to the risk taken.
For more details, see Chapter 16 of Vernimmen .
Have a nice day.

02-10-2017 : “Problem ”

You have identified an industrial investment project that you have secured the right to realize and whose net present value at 6% is €15m. You finally decide not to carry out this project because of lack of financial resources, but to sell it to a third party who acquires the right to carry out this project for €15m.
For this third party, what should be the net present value of this project all included and what will the IRR be if the reality is in line with expectations?
The answer will be tomorrow.
Have a nice day.

29-09-2017 : “Quote of the day ”

"One doesn't die from having debts, one dies from no longer being able to incur them."   Louis Ferdinand Céline

28-09-2017 : “Can we say that if ROCE is higher than WACC, then the return on equity is higher than the cost of equity? ”

Yes, there is no doubt about that and it can be seen in the following way:   If the ROCE is higher than the WACC, then the entreprise value is higher than the carrying amount of the operating assets.   Since the value of the net debt has no reason to be greater than its carrying amount simply because the ROCE is higher than the WACC (since the debt does not participate in the creation of value beyond  the interest rate paid), and since the value of equity is equal to the entreprise value less the value of the net debt, the surplus between the entreprise value and the carrying amount of operating assets, benefits only to shareholders and not to debt holders.   Therefore, the value of equity is greater than the book value of equity as it is equal to the book value + this surplus.   And if the value of equity is greater than its book value, it is that the return on equity is higher than the cost of equity.   For more see, chapter 26 of the Vernimmen.   Have a nice day.

27-09-2017 : “Quote of the day ”

"One doesn't die from having debts, one dies from no longer being able to incur them."   Louis Ferdinand Céline

26-09-2017 : “Question asked during a recruitment interview for trainees. What is the impact of a credit sale of 100 on the 3 main financial statements? ”

On the income statement, there was an increase in sales by the amount of sales (VAT excluded), a decrease in inventories of finished goods for an amount equal to the cost of production of the object thus sold and an increase in the profit before tax for the amount of the difference between the sales and the production cost. The corporate income tax increases by the corporate income tax generated by this sale and the net result by the amount of the net result generated by this sale.   On the balance sheet, the receivables increase by the amount of the sale inclusive of VAT, inventories of finished products decrease by the production cost of the object sold and on the liability and equity side, the equity increases by the amount of the net result generated by this sale. Lastly, debts to the state increases by the VAT collected on this sale as well as the corporate income tax generated by this sale.   On the cash flow statement, the net income or the cash flow from operations are increased by the net income generated by the sale. The change in working capital is increased by the same amount  (sales including VAT - cost of production which reduces inventories - VAT collected - corporate tax payable), so that the impact on the cash flow from operations is nil; which is logical as the customer has not yet paid, the impact on the cash of the company of this sale on credit is nil.   Have a nice day!

25-09-2017 : “So typically American! ”

Facebook had plans to distribute new non-voting shares to its shareholders allowing Mr. Zuckerberg to continue to sell Facebook shares without falling below 50% of the voting rights; a level of votes he gets thanks to a third category of shares with 10 voting rights per share. The country that prides itself on being the champion of good governance is far from putting it into practice at home (one seventh of the S & P 500 members have several classes of shares with your different rights).
Shareholders took the case to court and Facebook has just withdrawn its project. If in France, everything ends with songs according to the Canadian proverb, in the United States, it is with a trial that everything ends!
To get the week off to a good start, remember that since July the SP500 index manager no longer accepts multi-class stock companies in its index; even if those already in the index can keep them in place.
Have a nice day (with songs and without being sued if possible ...).

22-09-2017 : “Quote of the day ”

"I've reluctantly discarded the notion of my continuing to manage the portfolio after my death - abandoning my hope to give new meaning to the term "thinking outside the box."   Warren Buffett

21-09-2017 : “Toshiba sells its memory chip division to a consortium led by Bain Capital for $ 19 billion ”

LBOs of this size have not been seen for a long time, the big LBOs in recent years have been around $ 5 billion. But we are very far from historical records, since for example the 10 th biggest LBO in history was $ 27 billion in size. At 3.5 times EBITDA, the price reflects both the situation of a seller forced to sell to escape the worst (due to its losses in its nuclear division) and a cyclical sector with heavy investments that makes that only a fraction of EBITDA is available to service debt. Its listed Asian competitor, SK Hynix, is currently valued 3 times EBITDA. Have a nice day

21-09-2017 : “Can we say that if ROCE is higher than WACC, then the return on equity is higher than the cost of equity? ”

Yes, there is no doubt about that and it can be seen in the following way:   If the ROCE is higher than the WACC, then the entreprise value is higher than the carrying amount of the operating assets.   Since the value of the net debt has no reason to be greater than its carrying amount simply because the ROCE is higher than the WACC (since the debt does not participate in the creation of value beyond  the interest rate paid), and since the value of equity is equal to the entreprise value less the value of the net debt, the surplus between the entreprise value and the carrying amount of operating assets, benefits only to shareholders and not to debt holders.   Therefore, the value of equity is greater than the book value of equity as it is equal to the book value + this surplus.   And if the value of equity is greater than its book value, it is that the return on equity is higher than the cost of equity.   For more see, chapter 26 of the Vernimmen.   Have a nice day.

20-09-2017 : “Quote of the day ”

"The only cause of the depression is prosperity."   Joseph Schumpeter

18-09-2017 : “A moment of brainstorming to start the week on the right foot ”

  Is it true that a 1 % increase in interest rates on a 10-year bond yielding a 1 % nominal interest rate, while the market rate is 1 %, causes the bond price to fall more than the same rate 1 % increase on a 10-year bond yielding a nominal interest rate of 6 %, while the market rate is 6 %?   Is the difference in impact of the same order as the difference in market rates (1 % versus 6 %)? Smaller ? Bigger ?   Same place, same hour tomorrow for answers.   Have a nice day  

15-09-2017 : “Question from one of our follower: If there are so many advantages with tap issues, why is it not used all the time frequent issuers are interested in tap issues? ”

A s reminder a tap issue is a new issue of a bond with the same characteristic than another bond issued a while ago, sold at the market price and which enlarges the size of the initial issue.   When you are not a frequent issuer, you may only issue a bond every 2-4 years because your financing needs are not that high. Having issued 3 years ago a 5-year bond, either you tap your initial issue but the maturity of the new bond will be 5 - 3 = 2 years which is pretty short and may create a future liquidity problem in your balance sheet if you finance long term capex with the proceeds; or you issue a new bond for 5 or 7 years for example. Most unfrequent issuer will choose the latter option and will not tap their initial bond.   For frequent issuers like governments, large corporates, etc. that issue bonds every quarter or semester, this is less of a problem, at least for the first years after the issue of a long term bond. They can do tap issues several times in a row, but after a while, they will stop for this liquidity problem as the maturity of the initial bond is fixed and cannot be changed.   Have a nice day  

15-09-2017 : “Question from one of our follower: If there are so many advantages with tap issues, why is it not used all the time frequent issuers are interested in tap issues? ”

As a reminder a tap issue is a new issue of a bond with the same characteristic than another bond issued a while ago, sold at the market price and which enlarges the size of the initial issue.   When you are not a frequent issuer, you may only issue a bond every 2-4 years because your financing needs are not that high. Having issued 3 years ago a 5-year bond, either you tap your initial issue but the maturity of the new bond will be 5 - 3 = 2 years which is pretty short and may create a future liquidity problem in your balance sheet if you finance long term capex with the proceeds; or you issue a new bond for 5 or 7 years for example. Most unfrequent issuer will choose the latter option and will not tap their initial bond.   For frequent issuers like governments, large corporates, etc. that issue bonds every quarter or semester, this is less of a problem, at least for the first years after the issue of a long term bond. They can do tap issues several times in a row, but after a while, they will stop for this liquidity problem as the maturity of the initial bond is fixed and cannot be changed.   Have a nice day