“Comment, question or quotation of the day”

23-02-2018 : “Quote of the day ”

Things can only be predicted after they've happened. 
Eugene Ionesco

22-02-2018 : “Question from one of our readers ”

I do not understand what is the risk of reinvesting coupons on a fixed-rate bond. When valuing a bond, implicitly it is assumed that the coupons received before maturity are reinvested until the maturity of the bond at the rate of return of the bond. Take the example of a bond that yields 8% over another two years. The market rate is 8%. The bond is then worth 100, ie 8 / (1 + 8%) + 108 / (1 + 8%)^2, which also corresponds, by multiplying the first term in the numerator and the denominator by (1 + 8%) : 100 = 8 x (1 + 8%) / (1 + 8%)^2 + 108 / (1 + 8%)^2, which is also equivalent to: 100 = (8 x (1 + 8%) + 108) / (1 + 8%)^2 and we can see that we need to capitalize the first flow of 8 at 8% over the second year to find a value of the bond of 100. That said, rates can change over the period. If they go up, you will be able to reinvest your coupon at more than 8% and if you can wait for the repayment of the bond without having to sell it before, you will have obtained a return of more than 8% on your investment. But if the rates go down, you will reinvest your coupon at less than 8% and if you wait for the bond to be repaid but can not sell it before, you will get a return of less than 8% on your investment. This is known as reinvestment risk on a fixed rate bond. For more details, see Chapter 20 of Vernimmen. Have a nice day.  

21-02-2018 : “Quote of the day ”

There is nothing more unbearable than the regularity of the exceptional.
Cioran

20-02-2018 : “Question from one of our readers ”

Question asked on the Vernimmen.com website. For the sake of consistency and homogeneity, in calculating the turnover of the ratios for suppliers and inventories, why do not we report these two items to turnover? Indeed, one expresses the working capital according to the turnover, the customer ratio according to the turnover, why it is not the same with the ratio for suppliers and inventories? What we are trying to measure with the ratio of suppliers is the average time with which they are paid, to get an idea of ​​the balance of power that may exist between the company and its suppliers and to have over time a idea of ​​the evolution in a positive or negative sense of this ratio. Imagine that the company buys products for 40 every day and sells its finished product for 100 per day. Imagine that sales and supplies are regular throughout the year. Finally, imagine that the company pays its suppliers on average 40 days, which is quite commonplace in Europe. As of December 31st, there will be 40 days of purchases in the supplier post representing the last 40 days of purchases not yet settled at the end of the year, ie 40 x 40 = 1600. If you make the supplier ratio in days of purchases , and putting aside the VAT, you will have: 1600 / (365 x 40) x 365 = 40 days. If you do it in relation to turnover, you will have 1600 / (365 x 100) x 365 = 16 days. The reality is 40 days, not 16 days, and you could draw erroneous conclusions from this 16 days assuming, for example, that suppliers would not trust the company, that it would have a bad payment history, or that it pays them quickly to have a lower purchase cost, etc. which would be rantings. We do not seek the homogeneity of a ratio to another ratio (between the ratio of customer and supplier delays, for example), we look for a homogeneity, for a given ratio, between its numerator and its denominator. Indeed the outstanding customers is due to the act of selling, i.e. the turnover. It is therefore normal that one uses then at the denominator the turnover. But for the suppliers, their amount is not related to the sales but to purchases, it is therefore the line purchases which is used in the denominator. The reasoning is the same for inventories. Sometimes it is not possible to find the accounting line purchases because the income statement is presented by function and not by nature. We can then be led to use turnover as the denominator in the ratio of suppliers, but it is a second-best that then allows comments for trends but not for absolute level. For more details, see chapter 11 of Vernimmen. Have a nice day.  

16-02-2018 : “Quote of the day ”

We don't seek enough information out of statistics, and we demand too many conclusions from them. 
Auguste Detoeuf

15-02-2018 : “Question from one of our readers ”

How to account for the effects of proportional consolidation in DCF or multiples method?
Do nothing special because everything has been integrated proportionally to the company's share in this subsidiary. There is therefore no minority interest to be valued and deducted from entreprise value. For more details, see Chapter 31 of the Vernimmen.
Have a nice day  

14-02-2018 : “Quote of the day ”

Buy low, sell high, play golf 
Anonymous

13-02-2018 : “Question from one of our readers ”

Why, in measuring a company's debt level and sustainability, is the net debt / operating cash-flow ratio not used instead of the Net Debt / EBITDA ratio? The net debt \ EBITDA ratio is better than the D \ operating cash-flow ratio from a conceptual point of view because the operating cash-flow is a cash-flow unlike the EBITDA and debts are repaid with cash. However, it suffers from two defects that make it practically not used in practice. The ratio net debt / EBITDA is popular, as it is very simple to calculate. Removing the change from working capital to EBITDA significantly increases the calculation time and requires 2 balance sheets instead of one. Moreover, because of changes in the working capital, the operating cash flow is much more volatile than the EBITDA. The net debt / EBITDA ratio would therefore be more volatile over time than the debt / EBITDA ratio, which is unacceptable for a "quick and dirty" indicator that should not vary substantially from one year to the next in order to be compared to a critical level that moves very little over time. Have a nice day

12-02-2018 : “Quote of the day ”

The single cause of the crisis is prosperity. 
Clément Juglar

09-02-2018 : “Question from one of our readers ”

How to account for the effects of proportional consolidation in DCF or multiples method? Do nothing special because everything has been integrated proportionally to the company's share in this subsidiary. There is therefore no minority interest to be valued and deducted from entreprise value. For more details, see Chapter 31 of the Vernimmen. Have a nice day  

02-02-2018 : “Question from one of our readers ”

 cannot understand why the more costs are included in the value of inventories, the greater the result of the year. An inventory of finished products (but this is also true for an inventory of raw materials), is the sum of costs that the company has incurred during this exercise to produce those finished products, but which cannot be left in the profit and loss account of this year as these costs were included in products that were not sold that year, but that should be sold in the following year. In fact, the income statement gives the result on the products SOLD this year, not on the products MANUFACTURED this year. Thus the cost of the raw materials and the share of the wages of the production workers who manufactured these yet-to-be-sold products will appear on the asset side of the balance sheet in the form of inventories of finished products, and no longert in the income statement as costs. So the more costs I add to my inventory, the more costs I take out of the income statement and put on the asset side of the balance sheet under the headline finished goods item. And the more costs I take out of the income statement, the higher the net income. For more details, see Chapter 7 of Vernimmen. Have a nice day.

01-02-2018 : “Quote the day ”

"Banks have a primary duty to be cautious, since it is other people's money that they lending." Michel Cicurel   Have a nice day!

31-01-2018 : “Question from one of our readers ”

Is the choice of the FIFO method (first in, first out) more advantageous than that of the LIFO method (last in, first out) to reduce my working capital (WC)?  It is necessary to see the WC, before being an equation of accounting items (stocks + customers - suppliers), above all like a cash lag between the moment when I pay my suppliers of all orders and the moment when I am paid by my clients. Under these conditions, the way in which I subsequently record inventories in FIFO or LIFO does not have an impact on the WC that pre-exists to its accounting measure, since it is fundamentally a cash lag. In some countries (like France), the tax authorities do not authorize the LIFO. Under IFRS, LIFO is also not allowed. So you have no choice. It is only in the USA where the accounting standards accept LIFO that the subject can arise. But it is only when the price variations of the elements of the inventories are important that the subject LIFO versus FIFO is really at stake. With the generally low inflation we are experiencing, this debate has little intensity, except in sub-sectors with volatile commodity prices. For more details, see Chapter 7 and 11 of Vernimmen . Have a nice day  

30-01-2018 : “Quote of the day ”

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

29-01-2018 : “Question from one of our readers ”

Why do stock option holders prefer that their company, if it is to redistribute cash, do so by share buy-backs on the market rather than by a public takeover bid or extraordinary dividends? The share-buy-back by purchasing shares on the stock market gives the impression that the share price must necessarily rise because there is one more buyer on the market. So stock options will have more value. But academic research has never shown that this supposed increase is real and significant in its amount. Conversely, the tender offer, which is generally made, with a premium over the stock market price of 10 to 15%, leads to a fall in post-tender shares prices, as well as for the extraordinary dividend when paid. And there is no automatic adjustment of the exercise price of the stock option in any of those two devices. Hence a certain impoverishment for their holders. For more details, see Chapter 37 of Vernimmen . Have a nice day.  

26-01-2018 : “Quote of the say ”

"One of the innate features of a bubble is that is will explode when one least expects it, and in a much more violent manner than one anticipated." Jean-Pierre Petit

25-01-2018 : “Question from one of our readers ”

Why is cash flow calculated excluding capital gains and losses on disposal? The logic is that the capital gains and losses are implicitly already taken into account in the selling prices of fixed assets sold that appear below in the cash-flow statement table (in the investment function). So we can not include them in the cash-flow too, otherwise those capital gains or losses would be counted twice. This allows to have a more stable cash-flow, that is to say, less likely to vary greatly because, most often, exceptional elements are non recurrent. For more details, see chapter 5 of Vernimmen. Have a nice day.  

24-01-2018 : “Quote of the day ”

"Banks have a primary duty to be cautious, since it is other people's money that they lending." Michel Cicurel

23-01-2018 : “Question from one of our readers ”

Why do you prefer the presentation of the cash-flow statement that ends up with the variation of the net debt rather than the variation of the available cash? The variation of the available cash, which is often the last line of the cash-flow statement established in an accounting logic, is not a relevant financial criterion because it can easily be modified thanks to window dressing. As an example, you pull out at the end of the year on a short-term credit line and use these funds to place them in your bank account. You will thus make appear a rise in cash available which can reassure the ill-informed reader, but which is completely artificial. By reasoning in the last line of the cash-flow statement with the variation of the net debt , one avoids this flaw and at a glance one knows if the company increased its net debt or reduced it over the past period, what we do not know by looking at changes in the available cash. For more details, see Chapter 5 of the Vernimmen. Have a nice day.  

22-01-2018 : “Why are US banks now announcing losses related to the lowering of the corporate tax rate from 35 % down to 21 % when this is a favorable measure for them? ”

In fact, those which have tax loss carryforwards and which activated them on the assets side of their balance sheet are in this situation. Indeed, when they recorded a pre-tax loss in the past, of 100 for example, they were able to reduce it to 65 by accounting for a future tax credit of 100 x 35% = 35 (taking into account the corporate tax rate of 35%). This was of course conditional on the expectation that, in the future, their earnings would be large enough to be offset against this loss of 100, thus saving them future taxes for 35. They then recorded among their assets in their balance sheet a deferred tax asset of 35. With a corporate tax rate that drops to 21%, the amount of deferred tax assets becomes false, since carryforward losses will no longer generate a tax saving of 35% of their amount, but simply 21% . Therefore, these deferred tax assets must be depreciated by 40% of their amounts ((1- 21/35) .Therefore the losses published at this time which concern only past estimates of future tax savings. For more details on deferred taxes, see Chapter 7 of Vernimmen. Have a nice day.

19-01-2018 : “Question from one of our readers ”

What is the difference between Roce (Retun on capital employed) and WACC (the cost of capital)?
On the one hand, there is what you ask for and on the other, what you get.
In exchange for the funds that they entrust to the company, investors want to obtain a minimum return that compensates them for the risk taken on their investment in the company: it is the cost of capital.
On the other hand, the company yields a certain rate of return on its operating assets, which have been financed entirely by funds provided by investors: this is ROCE.
There is no mathematical relationship between the cost of capital and ROCE. The first is a financial concept (required rate of return), the second is an accounting concept (achieved rate of return). On the other hand, their difference (ROCE - cost of capital) gives birth to the value created by the company (when ROCE > capital cost over time) or the value destroyed by the company (when ROCE < cost of capital over time).
For more see chapter 27 of the Vernimmen.
Have a nice day

18-01-2018 : “Understand who can! ”

A broker, certainly not one of the most important one, but the only one to follow this mid cap listed in Paris, has revised down its annual sales forecast now counting on €618m in 2017/2018 against €634 m. In addition, this broker targets an EBITDA of €38.2m, or 6.2% of sales, against a target of 6.5% set by the company. This broker maintained its Neutral recommendation while lowering its target price from 6 to 5.80€. So far, so good. The current share price is €3.50, offering, if you believe in the work of this broker, a potential price increase of 66% (sic). In these circumstances, why not a Purchase recommendation? Are there so many undervalued companies in its universe of analysis that a mere 66% increase to a target price deserves only a Neutral recommendation? Or does it want to please at the same time the savvy investor who understands that a recommendation Neutral means in plain English Sell, and the mid cap management who would not appreciate a Sell recommendation and could cut all investment banking business with this broker? As for the target price of €5.80, is it there to amuse the gallery and flatter the midcap, while deceiving the confident but inexperienced investor? In other words, does the investment banking business that this broker provides to the midcap, in addition to its financial analysis work, disturb its view? But has it forgotten the deontology and the rules of management of conflicts of interest between its interests (as an investment banker of this midcap) and as a professional financial analysist to its clients, the investors who read its works ? Have a nice day.

17-01-2018 : “Question from one of our readers ”

I just answered the first question of the quiz on vernimmen.com
Q1. In the absence of a corporate tax, does the rate of depreciation have any influence on cashflow? The answer is no. I do not understand the answer because cashflow = net income + depreciation + sundry other items. So if the rate of depreciation evolves, depreciation will evolve and there will be an impact on the cashflow?
You must understand that net income itself is affected by the amount of depreciation since in the absence of corporation tax, net income is equal to EBITDA - depreciation + financial result + exceptional result. Therefore cashflow is equal to: EBITDA - depreciation + financial result + exceptional result + depreciation + sundry other items = EBITDA + financial result + exceptional result + sundry other items, which is an indifferent balance to depreciation.
Have a nice day.

16-01-2018 : “Quote of the day ”

"No generation can contract debts greater than can be paid during the course of its own existence. " Thomas Jefferson

15-01-2018 : “An unexpected and positive side effect of a financial krach. ”

Until 1882, Paul Gauguin worked as a broker on the Paris Stock Exchange and was an artist in his spare time. The crash of the financial groupe Union Générale in January 1882, and the fall of the Stock Exchange that followed after a few years of irrational exuberance, made him lose his job and he decided to devote himself entirely to his artistic career. The Paul Gauguin exhibition at the Grand Palais in Paris, which inspired this note, closes its doors on January 22nd.   Have a nice visit and have a nice day.  

12-01-2018 : “There are no miracles in finance. ”

  Total had announced that it would continue to pay the same dividend per share despite lower earnings and free cash flows due to falling oil prices. The oil group had succeeded in doing so by proposing to its shareholders to receive their dividend, at their discretion, in Total shares issued with a discount of 5% on the share price or in cash. Every quarter, nearly two-thirds of its shareholders opted for the dividend in Total shares, because pocketing a 5% discount is not something most investors refuse. Those in need of cash resale the shares thus obtained. And Total has thus saved in cash for quarters almost two thirds of its dividend. For the first time at the end of 2017, Total offered to pay its quarterly dividend in cash or in Total shares, but without the 5% discount. Guess what ? Total has just indicated that the proportion of shareholders who, in these circumstances, opted for the scrip dividend has fallen to 21%. Shareholders know how to count. . . If the price of a barrel does not relapse, it is likely that the next step for Total will be to pay a dividend entirely in cash. You may be wondering why Total had to use this scheme to post a constant dividend per share, but paid for a very significant portion in shares issued with a discount on prices, rather than lowering its dividend and paying it in cash only to the level of free cash flow generated after oil price decline. The answer is that in the small world of super majors oil companies, 4 Anglo-Saxon and Total, shareholders, often Anglo-Saxon pension funds, are there to receive dividends that will allow them to pay regular pensions to their pensioners . Any decline in the facial dividend would have been ill taken, breaking the bond of trust that dates back to 1981, the last time Total lowered its dividend. In the same vein Shell's CEO (Ben van Beurden) declared: "The dividend is a sacred element at Shell, I will do everything to protect it" and he used the same trick as Total to maintain constant its dividend per share despite a collapse of 60% in the oil price.
All this may seem artificial to you, but who would have told you that behavioral finance did not exist? Have a nice day.  

11-01-2018 : “Quote of the day ”

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

10-01-2018 : “Question from a reader ”

I just answered the first question of the quiz on vernimmen.com Q1. In the absence of a corporate tax, does the rate of depreciation have any influence on  cashflow? The answer is no. I do not understand the answer because cashflow = net income + depreciation + sundry other items. So if the rate of depreciation evolves, depreciation will evolve and there will be an impact on the cashflow? You must understand that net income itself is affected by the amount of depreciation since in the absence of corporation tax, net income is equal to EBITDA - depreciation + financial result + exceptional result. Therefore cashflow is equal to: EBITDA - depreciation + financial result + exceptional result + depreciation + sundry other items = EBITDA + financial result + exceptional result + sundry other items, which is an indifferent balance to depreciation. Have a nice day.

09-01-2018 : “Quote of the day ”

“The “Vernimmen” is the perfect reference corporate finance book. I used it in my classes, looked back into it during my internships, use it again now to deep dive into corporate finance for my thesis and know I will keep interacting with it later in my career.”
André Geha, Graduate Student at MIT Sloan  

08-01-2018 : “Question from one of our reader ”

Why is a bond's sensitivity to market fluctuations higher for long-term bonds, and why is it stronger for bonds paying a low interest rate too? Imagine the bond as a wooden stick, with which you will leverage by leaning on a stone, to lift a large object. This wooden stick is all the longer as the residual life of this obligation is long. If this stick is short, that is to say that your bond has a short residual life, it will be difficult to move the object in question, because a short stick does not leverage much. Your bond therefore has a low sensitivity. If the stick is long because the reimbursement flow is far, it is easier to move the object. The sensitivity of the bond is therefore stronger. Now let us continue the analogy to understand the influence of the intermediate flows, that is to say the interest paid on the bond, for a given duration of the latter and therefore for a given length of the stick. The interest payments will be spread over the length of the stick as weight and will be all the more so heavy as the interest rate of the bond is high. If these weights are heavy, they will hinder the movement of stick which, because of this, will move less the object to lift. The sensitivity of the bond will be low. If now the interest paid by the bond is low, the weights on the stick will be small and will not interfere much; leverage will thus be stronger than before and the sensitivity of the bond will be high. If this literary and analogical explanation did not convince you, you still have to make simulations from the modeling of the value of a bond on an excel file to experiment this double relation. Or to resume your mathematics classes to see that the first derivative of the sensitivity in relation to the maturity is positive, and negative in relation to the bond interest rate. Have a nice day.  

05-01-2018 : “Intel ”

The reaction of Intel's stock price and that of its competitors the day before yesterday is an excellent illustration of the theory of portfolio and that of efficient markets. When Intel's share price declines by more than 5% in response to product security concerns, its rivals rise at the same time as investors immediately anticipate that Intel customers will switch suppliers. Not putting all your eggs in one basket for those who want to limit the specific risk of a share is not a bad (or recent) idea! Have a nice day.  

04-01-2018 : “Question from one of our reader ”


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.

03-01-2018 : “Mergers and acquisitions in 2017. ”

  4th year of the high cycle phase of this highly cyclical activity and highly correlated with stock market indices (see the first graph of chapter 44 of Vernimmen, which goes back to 1986). The United States are still impressive with a volume of transactions almost double those in Europe ($1635bn against $861bn) when their GDP is only 10% higher. Happy American M&A bankers who benefit in addition of a lower level of competition compared to Europe. Asia again in front of Europe ($939bn) for the third year in a row.   Have a nice day  

02-01-2018 : “While visiting the temporary exhibition at the Jacquemart-AndrĂ© museum in Paris, dedicated to the Hansen Collection of French paintings, you may wonder why ”

While visiting the temporary exhibition at the Jacquemart-André museum in Paris, dedicated to the Hansen Collection of French paintings, you may wonder why Wilhelm Hansen had to sell half of his collection in 1922 because of the bankruptcy of his bank, Danish Landmansbank. Indeed, the causal link is not obvious. In fact, the bankruptcy of the lender does not directly concern the borrower, who remains of course debtor of his debt, except for the cash he may have entrusted to him. In fact, along with other collectors and art dealers, Wilhelm Hansen had formed a consortium able to buy entire collections of paintings to keep the ones they were interested in and sell the others. To finance themselves, they had been indebted, in the short term to the Landmansbank, which regularly renewed the loan while it was in activity. When it went bankrupt, its liquidator demanded, of course, repayment of the short-term credit when it was due. And since the guarantee (the paintings) were not particularly liquid (oils as well as pastels), Hansen and his associates, who held to their honor, sold the paintings rather than defaulting.   All this could have been avoided, my wife said to me with good common sense, if they had run into long term debt. The problem is that banks at that time only lent in the short term because they had only short-term resources. The banking transformation was still in its infancy. Have a nice day and a happy New Year.  

29-12-2017 : “Quote of the day ”

"Capitalism, as Marx has understood so well, is not destined to survive." Nikita Krouchtchev

28-12-2017 : “Question from a participant to the ICCF@Columbia Business School ”

  I do not understand why overvaluing stocks of raw materials is inflating net income artificially? Think about the balance sheet, it's easier on this point. If, on the assets side, the inventories value is fictitiously increased, then in the liabilities and equity side, because it is necessary to keep the balance sheet balanced, the only item which will be inflated correlatively is equity, via the net income, which is higher this exercise. As a matter of fact, we bought for 100 what we will value in stock at the end of the year for a fraudulent amount of 110 for example, hence a fictitious profit of 10. This is done to the detriment of next year net income where the cost of the raw material will have increased, reducing margins, since corresponding to the price in stock of the raw material which price was fraudulently inflated this year. For more details, see Chapter 7 of Vernimmen. Have a nice day.  

27-12-2017 : “Quote of the day ”

"Dividend - procedure used to get at profits, when all other procedures have been exhausted." Auguste Detoeuf

26-12-2017 : “We are pleased to announce that the fifth edition of The Vernimmen is now available from all good bookstores and on-line retailers. ”

With thousands of copies of the latest edition sold, Corporate Finance, Theory and Practice is one of the most popular financial textbook, thanks to its four unique features:  • A balanced blend of theory and practice: authors hold academic positions at top ranking business schools and are also investment banker, private equity investor or sit on the boards of listed and unlisted companies.  • A presentation of concepts that explain situations, followed by a discussion of techniques in a direct and succinct style.  • Content enriched by the www.vernimmen. com website, which is one of the leading finance teaching sites worldwide.  • Free monthly updates on finance through The Vernimmen.comNewsletters, with over 70,000 subscribers.  For this edition a new chapter was created. It is devoted to managing operational real estate and should help you to answer the frequently asked question: Should the company own or rent its operational building? This not of small importance and will be particularly helpful as companies following IFRS or US GAAP will soon be required to account for operational leases in the same way as financial leases are accounted for. The summary of this new chapter is available on http://www.vernimmen.com/Vernimmen/Summaries_of_chapters.php We have also done a major updating job to create a tool that is accurate, reliable, comprehensive and relevant. We have included the very latest accounting standards, most statistics and graphs are from end 2016, the latest innovations in financial practice are discussed and the latest financial theories are presented. To make sure that you get the most out of your Vernimmen, each chapter ends with a summary, a series of problems and questions (832) (solutions provided). For those interested in exploring the topics discussed in greater depth, there is an end-of-chapter bibliography and suggestions for further reading, covering fundamental research papers, articles in the press and published books. A large number of graphics and tables (over 100) have been included in both the appendix and in the body of the text which can be used for comparative analyses. There are over 3,500 entries in the index.  To have a look on the contents of the 2017 edition of the Vernimmen go on page http://www.vernimmen.com/Vernimmen/2017_Edition.php and to buy the 2017 edition of The Vernimmen, go on page https://www.amazon.co.uk/gp/product/1119424488/ref=as_li_tl… What they said about 2017 edition of The Vernimmen:  “I discovered finance with ‘The Vernimmen’ about 30 years ago. Since then the different versions have accompanied me throughout my career and throughout the world. Not only was the alignment of the successive editions looking good in my different offices but I must confess I have opened and cherished each of them. Whether an investment banker, a CFO in a universal bank or more simply a world banker…”
Bertrand Badré, Former Managing Director and CFO of the World Bank “What sets the Vernimmen apart from other textbooks is its integration of practice and current affairs in a rigorous theoretical framework. Recipes and pontification are replaced by a scientific approach. And, thanks to the Newsletter, this is done practically in real time!”
Christophe Evers, Professor of Finance at the Solvay Brussels School, Executive Director of Texaf “I always use the paper edition of the Vernimmen, which is clear and comprehensive, as a reference tool. The site is well designed, always up-to-date and also extremely useful for explaining financial concepts simply and intelligently to non-financial colleagues.”
Laurence Debroux, Member of the Executive Board / CFO of Heineken “Corporate Finance is a very useful reference book for students and practitioners, it will help both to understand the principles of the financial markets and their practical application in today's complex environment. The book's approach is both logical and sequential and presents some interesting cases that make study easier and more stimulating.”
Gabriele Galateri, Chairman of Generali, former chairman of Telecom Italia and Mediobanca, former CEO of FIAT "Vernimmen provided people like me who were new to the world corporate finance a perfect mix of theory and practical examples to help them develop long lasting financial concepts. The book is a written manual for finance, explaining the fundamentals in a very thought provoking way, making it intriguing to delve into the complexities. This book is a must have in your personal library as you will refer back to it even after years."
Sharat Gangwani, Business Response Analyst at Citadel LLC “The “Vernimmen” is the perfect reference corporate finance book. I used it in my classes, looked back into it during my internships, use it again now to deep dive into corporate finance for my thesis and know I will keep interacting with it later in my career.”
André Geha, Graduate Student at MIT Sloan “Vernimmen's Corporate Finance is an outstanding clear and complete manual, a wonderful merger of practice and theory. Its coverage of the market aspects of corporate finance distinguishes its content, but its treatment of all the material makes it essential reading for the student, financier or industrialist.”
Howard Jones, Senior Research Fellow in Finance at Saïd Business School, University of Oxford “The Vernimmen: proof that an outstanding teaching approach and genuine accessibility are fully compatible with comprehensive and sharp analyses.”
Christian Mulliez, Executive Vice-President and Chief Financial Officer L’Oréal “The book itself covers all the important techniques that a financial manager must have in his repertoire of tools. The exposition is clear and concise and, most importantly, relies on commonsense reasoning throughout. This is not a book with obscure formulae, yet is still rigorous and at the same time a model of clarity.”
Richard Roll, Joel Fried Professor of Applied Finance at UCLA Anderson

22-12-2017 : “American tax reform ”


We will comment 3 points:
1 / The United States becomes the 3rd largest country to limit the tax deductibility of financial expenses. After France which limits the deductibility of financial expenses greater than €3m to 75% of their amount, the United States joins Germany by refusing tax deductibility for financial expenses that exceed 30% of EBITDA.
From a financial point of view, there is no reason for the state to encourage a specific tax reduction (the deductibility of financial charges) for companies to prefer a source of financing (indebtedness) to the detriment of another (equity), especially when excessive indebtedness generally increases business difficulties. For more details, see The Vernimmen.com Newsletter n° 62, November 2011. 2 / The United States abandons their worldwide tax system for corporate income tax that taxes foreign affiliates of US groups on their profits made abroad when they were repatriated to the United States in the form of dividends, which are then taxed for the difference between the US 35% rate and the local rate. As the US 35% rate was one of the highest in the world (see The Vernimmen.com Newsletter n° 105, July 2017), the consequence of this system was the incentive not to repatriate to the United States the profits of foreign subsidiaries that are not reinvested locally and to accumulate piles of cash abroad, as famously illustrated by Apple (see The Vernimmen.com Newsletter n°75, July 2013); all while waiting for a measure of grace, as there was in the past, allowing an exceptional repatriation during a few months with a very reduced taxation. Alternatively, some US companies were being absorbed by a foreign company in order to evade the US tax system for their foreign affiliates. We have seen merger-acquisition transactions mainly explained by tax considerations, which does not seem very healthy (see The Vernimmen.com Newsletter n°83, September 2014).
The lowering of the corporate tax rate from 35% to 21% of course made this global profit regime essentially ineffective since most of the world's major countries have a tax rate close to or higher than 21% (the United Kingdom and Switzerland are exceptions). 3 / The non-real estate capital expenditures of US companies become fully deductible from the base of their corporate income tax until 2022. No need to wait several years by the technique of depreciation to obtain this outcome. Have a nice day    

21-12-2017 : “Can the decision to split the share price of a publicly traded company have an impact on the value of that company? ”

In all rationality no. If you multiply the number of your shares by 10, normally the share price is divided by 10 at the same time. In fact, whatever the number of shares in which a cake is cut, the size of the cake does not change. However, it can rarely happen that there is an increase in the total value of shares because a large split makes the purchase of this share accessible to a larger number of small shareholders. In addition to Berkshire Hathaway's A shares currently quoted at $ 298,200 each, B shares are listed, which represent 1 / 1,500 of the A shares and are worth $ 198.98 at the same time against a theoretical value of 298 200/1500 = $ 198.80. But you see that the gap is small. Have a nice day

20-12-2017 : “Quote of the day ”

"Dividend - procedure used to get at profits, when all other procedures have been exhausted." Auguste Detoeuf

19-12-2017 : “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.

18-12-2017 : “Quote of the day ”

"The ultimate risk is not taking a risk." James Goldsmith

15-12-2017 : “Question from one the follower of the Vernimmen Facebook page ”

What is the difference between Roce (Retun on capital employed) and WACC (the cost of capital)? On the one hand, there is what you ask for and on the other, what you get. In exchange for the funds that they entrust to the company, investors want to obtain a minimum return that compensates them for the risk taken on their investment in the company: it is the cost of capital. On the other hand, the company yields a certain rate of return on its operating assets, which have been financed entirely by funds provided by investors: this is ROCE. There is no mathematical relationship between the cost of capital and ROCE. The first is a financial concept (required rate of return), the second is an accounting concept (achieved rate of return). On the other hand, their difference (ROCE - cost of capital) gives birth to the value created by the company (when ROCE > capital cost over time) or the value destroyed by the company (when ROCE < cost of capital over time). For more see chapter 27 of the Vernimmen. Have a nice 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