11

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 aren't using their \$200 billion is because doing so would cost them tens of billions of dollars in taxes. The current US tax code taxes corporations at 35% when ...


7

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 understand more complex applied or academic research. 1. Gross yield The gross yield is the yield on an investment before the deduction of taxes and expenses. $$1+R_{t+...


5

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 realized returns on firm debt are much lower than the realized returns on firm equity. Does this mean that firms have too much equity? If equity capital always ...


5

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: $$ r_E(Unlevered) = \frac{E}{E+D}r_E(Levered) + \frac{D}{E+D}r_D$$ And this is the WACC.


5

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 owners of ABC can set up another parent company, let’s say ABC global in some tax haven like Luxembourg. Afterwards they can transfer some intellectual property (or ...


4

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 company pays to obtain financing for projects. These types of financing are clearly listed in the wikipedia article and clearly extend beyond stocks and bonds ...


4

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 are referring to the former, one of the theoretical papers for borrowing constraints on markets with asymmetric information is the following one: Stiglitz and ...


4

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 through depreciation and amortization. Same goes for a software for example: in 5 years time, a software might be obsolete, so we need to reflect this in the ...


4

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 cash. It saves them the transaction costs of re-raising debt when they need it, had they paid it down early. It's cashflow that typically kills businesses, ...


4

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 they are traded on secondary markets (stock exchanges) among stock owners, not bought from / sold to the actual company which issued the stock.


4

[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. Assuming Korea is the early-adopter country, then all countries theretofore untreated before 1997 may serve as a counterfactual. This includes the countries never ...


4

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) − CEQ) / AT Where AT is Total Assets from Compustat/Fundamentals/Balance Sheet Items CSHO is net number of all common shares outstanding from Compustat/...


4

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 its clients' assets, it will have some assets of its own, eg offices and computer systems. But the total value of the assets it owns will be a tiny proportion ...


3

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 the "Know Your Customer" (KYC) regulations: they should be able to find out who will benefit ultimately from the transactions, or in the name of whom they are ...


3

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. In addition, some regulated firms like banks are required to prepare documents on calendar quarters regardless of the month of their fiscal year end, and it is ...


3

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 $u(x,y) = f(x) + y$, where $f$ is strictly increasing and strictly concave. The consumer's problem is thus $$ \begin{align} \max_{x,y} &\quad f(x) + y \\ \text{s.t.} &\quad ...


3

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 - Financial Markets & Corporate Strategy PhD 1st year level - strictly articles from Journal of Finance, Review of Financial studies, etc, that empirically ...


3

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 $$ p_1 288 + p_2 180 + (1 - p_1 - p_2) 120 = 180 $$ is underdetermined, there are infinitely many solutions to it. Now if you solved the equation system $$ \...


3

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 with the obvious limitation that nobody wants to be owed money by the firm. Although equity often ends up worthless after all creditors have their claims settled, ...


3

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 distorting (unless you actually want less B and more A due to externalities). Here the tax deductibility makes debt cheaper compared to equity. We know this is ...


3

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 marketing algorithms only get better when servicing larger numbers of people. The introductory/undergraduate literature that should be relevant in these cases is ...


2

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 tenor to the demand for assets of a given tenor. Financial intermediation allows maturity mismatches to exist in non-finance sectors of the economy by taking ...


2

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 bonds at 4%, it's WACC is: $$\frac{(4\%*4,000,000 + 6\% * 1,000,000)}{4,000,000+1,000,000} $$ which for simplicity we can say is $$\frac{(4\%*4 + 6\% * 1)}{4+1}...


2

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 each demanding a different interest rate and with given percentage contribution each to the total funds we want to borrow, then what would be the single ...


2

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 company gives to its customers, compared to the terms of credit that enjoys from its suppliers. It describes the (short-term) phenomenon, peculiar to some, that "...


2

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 transaction deposits at depository institutions (which are financial institutions that obtain their funds mainly through deposits from the public, such as ...


2

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 ticker allow you to skip all the paperwork. Back to topic. A Limited company is a legal person, thus it can buy / sell and hold other companies and assets - sue ...


2

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 successful. However, this measure is constructed based on the acquisition of the firm, not the bid of the acquirer, so that if there are multiple bidders this is ...


2

What happens is completely dependent on the owners. They're the ones whose income has been taken anyway. They may be the only ones with the legal power to do anything (depending on the jurisdiction: there may be some countries where the State can intervene in such matters). In some jurisdictions, the directors have a legal obligation to maximise returns to ...


2

They are not the same. Basic accounting equation: Assets = Liability + Shareholder Equity Assets refers to what the company actually owns: cash, property, inventory, etc. Assets are paid for in two major ways: debt (liability) and stock (equity). Essentially, everything a company owns is paid for by a combination of (1) getting loans from other entities ...


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