European low cost carrier Ryanair announced a new project
that will install Split Scimitar winglets on each of the company's
Boeing 737-800s. The installation is expected to reduce fuel consumption
by 1.5 percent and reduce CO2 emissions by 165,000 tons per year. So,
the project is green for the environment, but is it green for stock
holders? A quick calculation shows that it is. Based on the numbers,
Ryanair spent €1.14 billion on fuel in a recent quarter, which amounts to €4.56 billion per year. A 1.5 percent savings in fuel costs is
€68.4 million per year. This savings results in a payback period of 2.92
years. Assuming a 10 percent discount rate and 20 years of operation, the NPV is about €382 million. Sounds like a green, green project to us.
Essentials of Corporate Finance
Sunday, February 19, 2023
A Green NPV
Wednesday, January 25, 2023
Your Song (Is For Sale)
Any stream of cash flows can potentially be sold for the present value
of its cash flows. And one of the biggest cash flows being sold recently
is an artist's song catalog. The owner of a song catalog receives the
cash flows from the royalty paid whenever a song is played. It was
announced yesterday that Justin Bieber's song catalog
was sold for a reported $200 million. And although we agree that this
is a tidy sum, it is still smaller than the $500 million that Bruce
Springsteen or $300 million that Bob Dylan received last year for
similar sales. The price isn't cheap as song catalogs are reportedly
being sold for 30 times annual royalties.
Future Stock Returns
As Mark Twain once said, "Prediction is difficult - especially about
the future." And while investors would wish otherwise, predictions about
the stock market are especially difficult. Many investors will use
historical returns as an estimate of future returns. However, the job of
an analyst is to make stock market predictions based off additional
evidence. Recently, Vanguard, one of the largest mutual fund companies
in the world, released its 10-year annualized forecast
for financial markets. Vanguard is estimating only a 4.7% to 6.7%
annual return for large-cap U.S. stocks and a 5.0% to 7.0% annual return
for small cap stocks. So will the stock market achieve its historical
average return over the next 10 years, or is Vanguard correct? Check
back with us in 2033!
Wednesday, January 11, 2023
It Was In My Other Pocket
Have you ever been short on money and gone through your clothes, only to
find a $20 bill that you had forgotten about? We are sure that you were
relieved. The same thing just happened to cryptocurrency exchange FTX,
which filed for bankruptcy back in November. FTX attorneys announced that the company had found $5 billion
in cash, liquid cryptocurrency, and other liquid investments! Of
course, it appears that there may be other pockets to check as the total
value of missing customer assets is $8 billion.
Monday, November 21, 2022
Liquidity and Bankruptcy
As investors have learned, like any other investment, cryptocurrency is
subject to volatility. The recent bankruptcy filing of crypto exchange
FTX shows, this volatility can be extreme. For example, the Ontario
Teachers' Pension plan wrote down $95 million
due to the collapse. As you probably know, bankruptcy occurs when
liabilities are greater than assets. However, bankruptcy can result from
a finer distinction between liabilities and assets, namely liquidity.
In the case of FTX, the company had $8.9 billion in liabilities and $9.6
billion in assets. So was the company forced to declare bankruptcy?
Liquidity. When you look at the balance sheet,
FTX had $900 million in liquid assets, $5.5 billion in less-liquid
assets, and $3.2 billion in illiquid assets. Think about it like way:
You owe $10,000 at the end of the week but your only asset is a $100,000
house. Yes, your assets are greater than liabilities, but you likely
won't be able to sell the house and receive the cash for the sale by the
end of the week, so you could be forced into bankruptcy. But FTX had
other problems as well. John Ray, who was appointed to oversee the FTX
bankruptcy and has overseen other large bankruptcies such as Enron, stated "Never in my career have I seen such a complete failure of corporate
controls and such a complete absence of trustworthy financial
information as occurred here."
Friday, November 11, 2022
It's Bobby Bonilla (Edwin Diaz) Day!
The New York Mets famously deferred $5.9 million in salary payable to Bobby Bonilla in 2000, instead paying the former $1.2 million per year from 2011 through 2035. Now, the Amazing Mets are at it again. The team just signed a deal with relief pitcher Edwin Diaz that was announced as a five-year, $102 million contract. Under the terms of the contract, the team will defer $5.5 million per year in 2023, 2024, and 2025, then $5 million per year in 2026 and 2027. In exchange, the team will make annual payments to Diaz through 2042. To complicate matters, there is an option year for 2028 and if the team picks up the option, none of the salary is deferred. It appears that the Mets like really long-term payments!
Thursday, September 29, 2022
Buying An Annuity
While you now know that, in general, an annuity is an equal payment with
a finite number of payments, how do annuities work in the "real world"?
To give you an idea, check out Charles Schwab's annuity calculator.
Notice, the website shows three different payment options. The first
option, "For my lifetime (single life)", offers the highest payout per
period. Using a mortality table for annuities, the insurance company estimates the number of payments on the expected life of the annuitant.
If the annuitant outlives their expected life, payments are still made
until their demise. However, if someone signs up for this type of
annuity and dies immediately, no payments are made by the company. The
second option, "For my lifetime and someone else's lifetime (joint
life)", the number of payments are based on the expected number of
payments based on the expected life of both individuals named in the
contract. Again, if either party outlives their expected life, payments
are still made until both parties pass away. Finally, "A set period of
time (period certain)", the number of periods that payments will be made
is fixed when the annuity is first issued. The interest rate used by
annuity issuers in all cases is based of current market interest rates
when the annuity is first issued.