11 votes
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Why would a cash-rich company borrow money?

You are right that it seems strange why a cash-rich company is borrowing. In the case of Apple, the money that they are borrowing is being used to pay dividends to shareholders. The reason why they ...
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  • 500
7 votes
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Foundational equations or concepts of Finance

Considering this is an Economics Stack Exchange site, I’m going to answer in the spectre of Financial Economics. These are the most foundational equations and ideas of Financial Economics to ...
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7 votes
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How can a company run out of cash when its stock prices is dropping?

It appears to me that it is the other way round: The RBS was running out of cash which is why the stock price was dropping. Stocks usually don't affect the immediate operation of a company, since ...
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5 votes
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Why was Modigliani-Miller so relevant and innovative when it came out?

People, particularly business leaders, seem to remain confused about this issue even today. At the core of is the question Is equity finance expensive?. We certainly observe in the data that the ...
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  • 15.9k
5 votes
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Deriving the Modigliani--Miller Theorem

The first equation can be written as: $$ r_E(Levered) = \frac{E+D}{E}r_E(Unlevered) - \frac{D}{E}r_D $$ Then, isolating the unlevered return gives: $$ r_E(Unlevered) = \frac{E}{E+D}r_E(Levered) + \...
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  • 714
5 votes
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Why is having a big corporation keep its money in foreign countries a bad thing in the public's eye?

Firms can always shift their profits from one tax territory to another via various methods. Consider a simplistic example, let’s say we have firm ABC that has most of its business in Sweden. The ...
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  • 43.6k
4 votes
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Deriving and explaining the weighted cost of capital

If you are asking "Is the WACC the amount that the company expects to earn on the stocks and bonds that it holds.." then the answer is no. The WACC, in very simple terms, is the amount of money a ...
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  • 2,891
4 votes

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

I don't know if you refer to the extensive margin (some borrowers not being able to get credit) or to the intensive margin (one borrower not being able to get as much credit as (s)he wants). If you ...
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  • 101
4 votes
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Depreciating companies intangible assets

All assets which have a finite useful life are depreciated. For example, your patents or copyright might hold for 5 or 10 years but no more. Thus, it is quite coherent to reflect the loss of value ...
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  • 1,067
4 votes
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Why do companies sit on cash while they have debt?

Debt is cheap. Flexibility is valuable. They hold debt + cash up to the point where the value of flexibility is still greater than the net cost of servicing the debt minus any interest earnt on the ...
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  • 8,012
4 votes
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Calculating Tobin's q from the financial statements of publicly listed companies

Tobin's q is defined as the ratio between the market value of the firm over the replacement cost of its assets. If you use WRDS, you can calculate it as follows: Tobin's q = (AT + (CSHO ∗ PRCC_F) − ...
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  • 15.9k
4 votes
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Connection assets under management and net worth

Fidelity Investments is a corporation which manages investments on behalf of clients. It does not own "its" assets under management. Those assets belong to its clients. In order to manage ...
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  • 7,270
3 votes
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How are shell companies used for tax evasion?

Another key feature of those shell companies is that they hide the ultimate beneficiary of the transactions. Banks, insurance companies and most financial services firm must make enquiries as part of ...
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  • 1,067
3 votes

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

A December fiscal year end, which gives a first quarter of three months ending March 30, aligns the fiscal and the tax year. This can be very convenient and in the United States is sometimes required. ...
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  • 15.9k
3 votes
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Are bank reserves part of M1 or only part of M2, and why?

Using the Federal Reserve's definition for M1 (warning, M definitions can vary between countries, so always check the local definition): "M1 is defined as the sum of currency held by the public and ...
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  • 2,720
3 votes
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Adding a non-binding constraint to the objective function

To illustrate what Tirole has done, let's consider a simpler environment. Consider a utility maximisation problem over two goods, $x$ and $y$. The consumer has utility function $u(x,y) = f(x) + y$, ...
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3 votes

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

From the answer to the question How does stock market drop affect the economy if it doesn't affect the corporations? I learned that "companies still routinely issue new stocks when they are in ...
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3 votes
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Corporate Finance Book Recommendations

frequent Corporate Finance textbooks are MBA level - Berk and de Marzo (2017) - Corporate Finance, 4th ed. (Stanford) Advanced undergrad and corp theory-specific - Grinblatt and Titman - ...
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3 votes

Risk neutral probability for each of 3 states

I cannot really follow your formulas, what is the logic behind them? Seems to me there is no way to divine three state risk-neutral probabilities from 1 financial instrument's prices. The equation $$ ...
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3 votes

Bankruptcy Vs default

Declaring bankruptcy is a step taken by companies to get protection from creditors. (They cannot seize collateral unilaterally, etc.) The company can still operate, within the legal framework, and ...
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3 votes
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Shouldn't corporate tax be calculated based on EBIT instead of EBT?

Indeed the debt tax shield is distorting. Any policy that will essentially distort prices to favor A over B will lead to too much A and too little B. So such differentials are (almost) always ...
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  • 5,459
3 votes
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How to justify the treatment and control groups for Difference-In-Difference with staggered implementation of laws?

[W]hy do they need to write down "adopted a leniency law at some later point of time"? Because in Korea case, the word "our sample period" means "1995-2002" already. ...
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3 votes
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Shouldn't big tech want to split up?

This is going to be a hard find because it is not true. These companies have increasing returns to scale over the relevant range and for the foreseeable future. Many technologies, particularly ...
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2 votes

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

The point @EnergyNumbers raises is correct, and it's easy to understand from an intuitive standpoint: One of the key roles of financial intermediaries is to match the demand for liabilities of a given ...
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2 votes

Deriving and explaining the weighted cost of capital

The first equation is dollars time interest over total dollars. For example, if a company wants to finance a project, issues \$1M in equity with an expected ROI to the investors of 6% and \$4M in ...
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2 votes

Deriving and explaining the weighted cost of capital

The concept of $\text{WACC}$ seems pretty straightforward... it is a weighted average percentage, calculated in principle as equation $(2)$ in the question shows. If we have two sources of financing ...
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2 votes
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Free Cash Flow to the Firm

Debt service cost is felt by equity owners and debt holders but neutral to the firm. Taxation does not care for cash flow, it is levied on tax law specific accounting profit, not even reporting profit,...
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2 votes

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

If I'm reading it correctly, Table X (page 2633) of Schwert (2000) (Journal of Finance, Hostility in Takeovers: In the Eyes of the Beholder?) says that about 78 percent of deals in 1975-1996 were ...
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  • 15.9k
2 votes
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External Financing and Corporate Growth

The assertion of the book is based on the phenomenon of commercial credit - the fact that business-to-business sales almost always are on credit, and the differences between terms-of-credit that a ...
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2 votes

How are shell companies used for tax evasion?

A shell is simply an inactive company - there is a market for shell companies because it allows ordinary persons to buy a ready to go business - for example public traded shells with a stockmarket ...
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