Trade-Credit Insurance

If you export goods to another country, one potential problem with credit is a swift devaluation of that country's currency. For example, in 1994, the Mexican peso fell from 4 pesos per dollar to 7.2 pesos per dollar in one week. The devaluation can make it difficult, if not impossible, for the importing company to pay its bills. To cover the risk there is trade-credit insurance. In fact, the recent decline in the Indian rupee is expected to generate a 10 percent increase in trade-credit insurance for imports to that country. With trade-credit insurance, if an importer has difficulty paying the counterparty, the trade-credit insurer will step in and pay the exporter. At the same time, the trade-credit insurer will make an agreement with the importer to pay the debt in installments, often over a three to five year period.

A Hot IPO Market

As we mentioned in the textbook, the timing of IPOs appear to follow a "hot market" phenomenon, meaning that that are a larger number of IPOs when the market is doing well. In the first nine months of 2013, there have been 63 IPOs, a 110 percent increase from same period last year. At the beginning of October, there were 116 IPOs in the pipeline that are expected to raise a total of $37 billion. During the third quarter, 92 percent of the IPOs were filed under the JOBS Act, which permits a confidential initial filing for emerging growth companies. The third quarter also continued IPO underpricing, with global IPO underpricing averaging 24.4 percent.

What Is A Name Worth?

For many companies, the brand name may be one of the most important assets. According to Interbrand, a leader in the valuation of brand names, the Apple brand is worth about $98 billion and Google's brand is worth about $93 billion. If you look at the methodology, you will see the financial analysis Interbrand uses for the valuation. The valuation method is economic profit, or economic value added (EVA), which was popularized by Stern-Stewart. Economic profit is the aftertax operating profit of the company minus a charge for the capital used. When discounting the projected aftertax operating profit, Interbrand references the industry WACC. You should note that the brand valuation is not just the name, but closer to the company value. Would you really buy the Apple name for $98 billion without the ability to sell iPhones, iPads, and iTunes? Probably not. One last question: Does the economic profit concept look familiar to you? We would hope so since it is basically an NPV analysis of the company as a whole, not just the NPV of an individual project.

Twitter And Efficient Markets

We like to think that the stock market is always efficient, but there are events that prove our belief wrong. Twitter's IPO will likely be hot, with huge investor demand. The company already announced that the stock would trade under the ticker TWTR, but it seems that many investors can't wait for the IPO. Today, the stock of Tweeter Home Entertainment Group (TWTRQ) exploded, rising by more than 1,500 percent before falling back to a gain of only about 670 percent. TWTRQ filed for Chapter 11 bankruptcy about 6 years ago, and although the stock is still listed on the OTC market, the company has very little upside. The explanation for the jump in price today is investor confusion about the ticker symbol. We hope that the twits trading TWTRQ didn't tweet to their friends about the great investment that they had just made.

#TwitterIPO

About three weeks ago, Twitter announced that it had filed for an IPO, although the filing was confidential at the time. Today, Twitter made its S-1 filing public, an indication that the company hopes to go public sooner rather than later. The disclosures reveal that the company's revenue for 2012 was $317 million, with a net loss of $79 million. There are 250 million active users on the service, with 100 million daily users. One million shares are expected to be sold in the IPO. With a valuation of $10 billion, the company will have a P/S ratio of about 31 and, of course, no reportable P/E.

A Bond Pricing Mistake

Everyone makes mistakes, even finance professionals. It was recently revealed that Goldman Sachs mispriced a Ford bond issue. Bond issuers usually price (set the coupon rate) by adding a risk premium to the YTM of a similar maturity Treasury bond. In this case, Goldman Sachs used a Treasury bond that was just issued the same week. This is called the "on-the-run" Treasury issue and will have a slightly different price, in part because it is the most actively traded Treasury near that maturity. As a result of using the on-the-run Treasury instead of the Treasury that was previously issued, it costs Ford $1.5 million in additional interest payments over the life of the bond. As a result, Goldman Sachs lowered its fee from the 35 basis points it charged on Ford's previous bond issue to 25 basis points, a savings in underwriting expenses of $1 million.

Cash Management And Transfer Pricing

Now that you know all about cash management, you are ready to pool the cash from the divisions of your company, even if they operate in different countries. One thing you must consider first is transfer pricing. Transfer pricing is the cost charged by one division of a company to another division of the company for goods or services. The transfer price is the price that would be charged by an outside, or arms length, entity. If the transfer is between divisions in the same country, the tax implications (other than state and/or local taxes) are minimal. However, if the divisions are in different countries, transfer pricing becomes important with regards to taxes. A recent article in Treasury & Risk  highlights some potential pitfalls in cash pooling for divisions in different countries. Cash management transfer pricing presents problems because cash pooling generally results in a higher interest rate earned on the combined deposits than the rate that would be received on on individual deposits. Similarly, any borrowing is generally less expensive. Additionally, there is the fact that the parent company should receive compensation for the time, effort, and expenses put into pooling the cash. As you will read, a number of factors affect transfer pricing when pooling cash from divisions in different tax jurisdictions.