Questions tagged [corporate-finance]

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8
votes
1answer
2k views

Why would a cash-rich company borrow money?

I have read that Apple Computer issues corporate bonds. Considering that it has $200 billion in cash, and the company complains it has been unable to spend its enormous amount of cash, why would they ...
8
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1answer
131 views

What is the percentage of announced Merger & Acquistion deals actaully completed?

I am assuming that not all M&A deals announced are completed. There are factors such as anti trust laws and consumer protection agencies that legally prohibit the two companies from completing the ...
7
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1answer
2k views

Deriving the Modigliani--Miller Theorem

In the Wikipedia article on the Modigliani--Miller theorem, it states two propositions. (It gives the cases of with and without taxes. Here I'll just focus on the case without taxes.) The first ...
6
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2answers
374 views

Foundational equations or concepts of Finance

The following is paraphrased from: Fundamental equations in economics For the other sciences it´s easy to point to the most important equations, inequalities, propositions or concepts that ground the ...
6
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3answers
2k views

Why was Modigliani-Miller so relevant and innovative when it came out?

The Modigliani-Miller theorem*, a foundation of modern corporate finance, basically states that, in a no-frictions world, two identical firms have the same enterprise value, regardless of their ...
5
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3answers
3k views

How are shell companies used for tax evasion?

The recent release of leaked documents on Mossack Fonseca has information on corporations and individuals using the firm's services for, among other things, tax evasion: The massive security breach ...
4
votes
1answer
106 views

What is the classic paper that derives borrowing constraints from asymmetric information?

In reading the Wikipedia article about the "financial accelerator," I read this Firms’ ability to borrow depends essentially on the market value of their net worth. The reason for this is the ...
3
votes
3answers
1k views

Deriving and explaining the weighted cost of capital

The Wikipedia article for the "weighted cost of capital" (WACC) defines the WACC as "the rate that a company is expected to pay on average to all its security holders to finance its assets." What ...
3
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2answers
235 views

How to justify the treatment and control groups for Difference-In-Difference with staggered implementation of laws?

A. Background: Dong, 2019 and Dasgupta, 2019 used the same way to generate the treatment and control groups because they all learn about the impact of the same laws on different dependent variables. I ...
3
votes
1answer
129 views

Calculating Tobin's q from the financial statements of publicly listed companies

I'm interested in doing some empirical analysis of firm's investment behavior using financial statements (such as asset, working capital, operating cost, etc). One variable I want to manually ...
3
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2answers
933 views

External Financing and Corporate Growth

In a book on Corporate Finance, the author writes that 'all other things constant' the higher the rate of growth in sales or assets, the greater will be the need for external financing(bank loans, ...
3
votes
2answers
87 views

Where are bank loans in balance sheet?

I am looking at the balance sheet of Coca-Cola (https://www.marketwatch.com/investing/stock/coke/financials/balance-sheet), but I cannot guess where loans with banks are. These liabilities accounts ...
3
votes
1answer
48 views

Can corporate tax loss carryforward function like a sort of insurance policy?

I'm a graduate student in mathematics, with a casual knowledge of economics, so please let me know if this question is a non-sequitur or off base. Here's the intuition I'm trying to capture: Suppose ...
3
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1answer
34 views

Is there an equilibrium between privately owned and publicly listed companies?

Private equity funds are increasingly taking formerly public companies off the exchanges. Is there an economic reason for any public companies to exist and what is the equilibrium share of public ...
2
votes
1answer
68 views

Why do companies sit on cash while they have debt?

Why don't they use cash to pay down their debts?
2
votes
2answers
89 views

Why does Walmart (SYMBOL:WMT) have its Q1 2015 end April 30 instead of March 30

The Walmart 10-Q form covers the period for the three months ending April 30th while other companies post their first quarter reports for the three months ending March 30th. Why does Walmart end one ...
2
votes
1answer
566 views

Adding a non-binding constraint to the objective function

I am dealing with a constrained optimization problem found in Tirole's Theory of corporate finance. My question is not related to the details of this model, but just to provide some context, we are ...
2
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2answers
246 views

Does commercial paper usually carry a higher yield than corporate bonds? Why?

In Banking: A Very Short Introduction, Goddard and Wilson write: [Commercial paper] usually carries a higher yield than corporate bonds. But aren't corporate bonds longer term than commercial ...
2
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2answers
1k views

Why is LIFO allowed in accounting?

I was reading about inventory valuation and of course there is first-in - first-out, last-in - first-out and weighted average. I realized at some point that LIFO would cause the highest Cost Of Goods ...
2
votes
2answers
191 views

How come websites such as Khan Academy and Anatomy Zone do not charge for their services?

I've noticed that most educational websites do not charge for their services, even if they are maintained by only one or very few people. Some of these websites are so comprehensive that they require ...
2
votes
1answer
52 views

Why is it relevant for a company to use dividends to incentivize shareholders to maintain ownership of the company's stocks?

I was reading the definition of "Bottom Line" on Investopedia and one of the reasons companies increase their bottom-line is to issue payments (dividends) to stockholders as an incentive to ...
2
votes
1answer
95 views

Who holds the Reverse Repo and Repo respectively in a Repurchase Agreement?

According to investopedia.com in this definition A reverse repurchase agreement, or "reverse repo", is the purchase of securities with the agreement to sell ...
2
votes
1answer
254 views

Original data Altman used for his z-score formula

At our university we are researching the usefulness of failing (bankrupticy) prediction models. We are interested in the original datasets Altman used for his models. Does anyone know where this ...
2
votes
1answer
89 views

Academic paper which justifies why companies are run better privately

A few years ago I was reading The Economist and I remember it stated a particular academic paper that underpinned the rationale for the existence of private equity firms. I have tried to find this ...
2
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2answers
260 views

Firms Betas - Equity, Debt betas

My question is related to the following equation: $$\beta_{asset}=\frac{Equity}{Equity+Debt}\beta_{equity}+\frac{Debt}{Equity+Debt}\beta_{debt} $$ Why can the $\beta_{asset}$ be seen as if the firm ...
2
votes
2answers
329 views

How does the Fama and French 3-factor model explain stock covariance?

Does it at all? If so, how? It is understood that size and value play a role in determining returns and there are proposed explanation those these, but what about covariance?
2
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1answer
143 views

Does development aid, negatively effect the development of developing countries?

Development aid Development aid or development cooperation (also development assistance, technical assistance, international aid, overseas aid, official development assistance (ODA), or foreign aid) ...
2
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0answers
75 views

If the company were to buy back all their shares, does that mean the company would own itself? [closed]

If a publicly traded company buys back all it's shares from the public, majority holder and every last person that owns it's shares who would own the company? Obviously, it wouldn't be a normal ...
2
votes
1answer
123 views

Stock Valuation - Interest rates, Dividends, and Shares Repurchases

I'm reading a macro book (Blanchard's) and the way he values shares is by calculating the net present value of all dividends we expect to receive by owning some stock, discounted by the interest rates ...
2
votes
2answers
665 views

How do we explain the difference in average leverage between banks and non-financial firms?

I've been reading a little about the capital structure of banks. For example, in this working paper, "Financing as a Supply Chain: The Capital Structure of Banks and Borrowers" by Gornall ...
2
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1answer
37 views

Ratios to determine company's current purchasing power

what are the parameters which will affect a company ability to buy a new product based on its current financial situation. Is there any metrics or ratios which will tell the current company ...
2
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1answer
55 views

negative interest rate lending ripple effects

I was attempt to describe the ramifications of negative interest rates across benchmarks. I can foresee the business practice changes amongst holders of government bonds, savings accounts, ...
1
vote
1answer
55 views

Connection assets under management and net worth

Could you help me to understand the connection between assets under management and net worth? In my understanding, if a corporation has $X$ dollars Assets Under Management, and if a shareholder owns $...
1
vote
2answers
189 views

Corporate Finance Book Recommendations

Can you share your recommendations for corporate finance if you have any? A slightly more detailed version would be better: For example, something like: Advanced Undergrad: Varian's $\textit{...
1
vote
1answer
54 views

How can a company run out of cash when its stock prices is dropping?

For instance, in 2008, the Royal Bank of Scotland saw its stock price drop by ~30% in a day, and it was apparently impossible for the bank to make it till the end of the day because it would run out ...
1
vote
1answer
79 views

Depreciating companies intangible assets [closed]

Companies intangible assets are something which is not physical e.g. Patents, copyrights etc. How can we depreciate companies intangible assets and why it is done?
1
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1answer
83 views

Shouldn't corporate tax be calculated based on EBIT instead of EBT?

When I was studying Corporate Finance in university, I was surprised to learn that it is more advantageous for corporations to take more debt (even if they don't need to) because it creates tax shield ...
1
vote
1answer
59 views

Bankruptcy Vs default

If a company files for bankruptcy, how come its stock still trades ? E.g. On June 17, Wirecard was valued at more than $14 billion. Eight days later, it filed for the German equivalent of bankruptcy. ...
1
vote
1answer
140 views

Risk neutral probability for each of 3 states

I need help to find the risk-neutral probability for states 1,2 and 3 I have two stocks: A and B. The price of A today is 180 and in a year it will be worth 288 (S1), 180 (S2) or 120 (S3); The ...
1
vote
1answer
45 views

Where to learn financial modelling concepts and skills?

I'm looking to learn more about the financial analysis of a business. Things like unit economics calculation, income statement, free cash flow analysis, a valuation calculation, etc. Can you recommend ...
1
vote
1answer
6k views

Are bank reserves part of M1 or only part of M2, and why?

(1) Toyland earns $$100,000 revenue in cash this week. Toyland managers use this $100,000 to pay down a short-term loan from Bank One. Bank One keeps the cash in reserve. As a result of this ...
1
vote
1answer
51 views

Would the market stabilize if companies paid taxes on revenue instead of gross income?

Note: there is a closed question that is similar (https://money.stackexchange.com/questions/126677/paying-taxes-revenue-vs-taxes-profit) but the response offers a perspective that I would like to ...
1
vote
1answer
52 views

What does Eugene Fama mean "the amount of debt that's financed with equity isn't put aside"?

I transcribed A Symposium with 2013 American Nobel Laureates at Embassy of Sweden, Washington - YouTube starting at 56:00. The moderator, AAAS CEO Alan Leshner, claims Locking up that kind of money ...
1
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1answer
259 views

Economic Profit and the Return on Invested Capital

In my finance classes, I always learned that the a firm earning an "economic profit" is one for which its return on invested capital (ROIC) is greater than it's opportunity cost of capital (usually ...
1
vote
1answer
57 views

Is corporate tax an argument in equal income tax (from labour and capital) debate and does the return on capital depend on rate of the corporate tax?

In our country we have 25% personal income tax on labour, 15% corporate tax on corporations and 10% personal income tax on income from capital (e.g. dividends). Pundits in our country are saying that ...
1
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2answers
49 views

Why do businesses care about rate(s) of change?

I'd like to introduce math-students to the concept of average and instantaneous rate of change, in order to get them interested in the topic. I found the following example: Based on data from 1990 ...
1
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2answers
2k views

Net Present Value in Nominal Terms

I have the following question from my homework: When calculating the net present value of an investment project, the firm of Henry & Norman expects profit in the first year to be $60,000, and ...
1
vote
1answer
1k views

How does depreciation affect the cash flow in a tax-paying company?

I came across a question in first year's finance book.The question is: For a tax-paying firm, an increase in ______will cause the cash flow from assets to increase. A. Change in net working capital ...
1
vote
1answer
63 views

Free Cash Flow to the Firm

I've got this question: Explain why the FCFF does not incorporate interest expenses and what is the potential bias in the valuation if corporate taxes exist. Now, we know that in the Free Cash ...
1
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1answer
67 views

Understanding Leveraged Buyout

There is company A, which has Assets = \$100, Equity = \$50, Debt = \$50. I, Ant, found a new company, company B. I personally invest 10 in this company, and I find people who lend me \$50. Assets = \...