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Tag Archive: Cost of capital


Asset Pricing

Lets revisit an article I published a couple of months back  as we know all valuation classes teach the equity market correlation method soimages it would be interesting to hear your views.

Equity exists in many forms. In securitization, equity is the tranche that takes the first loss and controls the deal. In a mutual insurer/bank/thrift, etc., the book equity is held by the dividend-receiving policyholders. The real equity is held by management, who actually control the place, because the dividend-receiving policyholders will not vote them out. In a credit tenant lease, there is the guy that owns the property, and typically he puts up a teensy amount of equity, because there is a “credit tenant,” one that has an investment grade rating, and the mortgage is secured by:

the property
the senior unsecured credit of the “credit tenant,” whose lease payments pay the mortgage, and go directly to the lender, and
the equity owner. Continue reading

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Debt and Leverage

Couple of days back Macro business published an article on Leverage versus debt . Found interesting and thought of imagessharing my point of view on it.

Europe, Japan and America are printing money at an extraordinary rate. It has reduced the cost of debt to negligible levels. Usually this is explained with reference to what is happening in the conventional economy, but I suspect there may be another explanation. The systemic effects of the bizarre financial system that we have created, which is based on leverage. That leverage, which is thought of as debt, is not really what we mean by debt.

Continue reading

Recalling 4 years back , the world’s largest banks have been up in arms over threats by regulators to increase their A(equity) capital requirements. Making banks hold more capital, they argue, will force them to reduce lending and will increase their cost of funding, making credit more expensive throughout the economy. One of the chief defenders of the mega banks has been Josef Ackermann, CEO of Deutsche Bank until last year and also chair of the Institute of International Finance, which claimed that higher capital requirements would reduce economic output by a whopping 3.2 percent.

Was going through the new book by Anat Admati and Martin Hellwig The Banker’s New Clothes they have been tirelessly debunking the myth that higher capital levels will force banks to curtail lending and torpedo the global economy,. Some of the arguments against higher capital requirements are simply incoherent, like the idea that banks would be forced to set aside capital instead of lending it. Continue reading

 

EVA or Economic profitis a measure of company’s financial performance based on the difference between return on

invested capital and appropriate charge for the cost of capital invested in an enterprise or firm.

EVA = net operating profit after taxes [capital * cost of capital (WACC))]

EVA is an estimate of true “economic” profit, or the amount by which earnings Continue reading

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