Download PDF CORPORATE FINANCE THEORY AND PRACTICE Second Edition by Pierre Vernimmen

Sinopsis

For some Vernimmen readers, this will be your first financial crisis. It’s not the first we’ve seen and it won’t be the last. One thing we can be sure of, though, is that as long as the human species continues to inhabit planet Earth, we will continue to see the rise of speculative bubbles which will inevitably burst and financial crises will follow, as sure as night follows day.
 

Human nature being what it is, we are not cold, disembodied, perfectly rational beings as all of those very useful but highly simplified models would have us believe. Human beings are often prone to sloth, greed and fear, three key elements for creating a fertile environment in which bubbles and crises flourish. Behavioural finance (see p. 274) does make it easier to create more realistic models of choices and decisions made by individuals and to predict the occurrence of excessive euphoria or irrational gloom or to explain it after it has occurred (which is always easier!). But behavioural finance is in its infancy and researchers in this field still have a lot of work ahead of them. The origin of the financial crisis that began in 2007 is a textbook case. What we have here are greedy investors seeking increasingly higher returns, who are never satisfied when they have enough and always want more. It’s a pity that there are people like that about, but there you go.
 

So, banks started granting mortgages to people who had in the past not qualified for a mortgage, convinced that if, in the (likely) event that these borrowers on precarious incomes were unable to meet their repayments, the properties could be sold and the mortgage paid off, since there was only one way property prices could go and that was up − remember? This created a whole class of subprime borrowers. Along the same lines, LBOs were carried out with debt at increasingly higher multiples of the target’s EBITDA (see p. 926) and with capitalised interest, as the financial structuring was so tight that the target was unable to pay its financial expenses. This meant that virtually all of the debt could only be repaid when the company was sold. Subprimes were introduced into high quality bond or money market funds in order to boost their performances without altering the description of the mutual funds.With the official approval of the regulator, bank assets were transferred to special purpose deconsolidated vehicles (SIVs) where they could be financed using more debt than was allowed under the regulations. Banks could thus boost their earnings and returns by using the leverage effect (see p. 235).
 

In finance, risk and return are two sides of the same coin. Higher returns can only be achieved at the price of higher risk. And if the risks are higher, the likelihood of them materialising is higher too. This is a fact of life you should never forget or you may live to regret it sorely (see Chapter 21).

Content

1. FINANCIAL ANALYSIS
2. FUNDAMENTAL CONCEPTS IN FINANCIAL ANALYSIS
3. FINANCIAL ANALYSIS AND FORECASTING
4. INVESTMENT ANALYSIS
5. INVESTMENT DECISION RULES
6. THE RISK OF SECURITIES AND THE COST OF CAPITAL
7. FINANCIAL SECURITIES
8. CORPORATE FINANCIAL POLICIES
9. VALUE
10. CAPITAL STRUCTURE POLICIES
11. EQUITY CAPITAL AND DIVIDENDS
12. FINANCIAL MANAGEMENT
13. CORPORATE GOVERNANCE AND FINANCIAL ENGINEERING
14. MANAGING CASH FLOWS AND FINANCIAL RISKS

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