Granting Credit

As with many other decisions in corporate finance, the decision to grant credit is industry specific. A recent survey indicates that the median company grants credit to about 30 percent of its customers. The 25th percentile company grants credit to 20 percent of its customers and the 75th percentile company grants credit to 50 percent of its customers. Car dealers grant credit about 83 percent of the time, while health care companies grant credit only 30 percent of the time. As with most decisions, remember the decision to grant credit is an NPV decision.

Centerra's Kumtor Sensitivity

Centerra Gold, a Canadian mining company, recently released its NPV analysis of the Kumtor Mine, which is located in Kyrgyzstan. Centerra's release includes the projected cash flows for the next 11 years, the expected life of the mine. Centerra also conducted several sensitivity analyses, including a change in the discount rate, a change in the price of gold, changes in operating and capital costs, and changes in the exchange rate. We should note that Canterra proposes that the discount rate should only be 5 percent. This number seems low to us, especially when analyzing a project in a foreign country.

Activists Fail On Kohl's

Often, when an activist investor takes an interest in a company, the stock price will increase, especially if it is felt that management is performing poorly. Recently, a group of activist investors took a 9.5 percent stake in department store chain Kohl's. The group proposed a slate of nine new board members, which would give it control of the company. Kohl's argued that the new board members would disrupt momentum and rejected the nominations. In a nod to the market's belief that Kohl's is moving in the right direction, the stock price jumped almost 8 percent on the rejection.

2020 Dividends Hit Record

In early 2020, stories in the news were of companies lowering or eliminating dividend payments. However, these stories appear to be overblown concerning dividends. During the year, dividend payments reached a record of $503.1 billion. The economic slowdown did dramatically affect stock repurchases as buybacks in 2020 were only about $300 billion compared to the 3-year average of $700 billion. In the textbook, we discussed how repurchases allow a company more options than dividends when making payments stockholders and corporate payout actions in 2020 appear to support this argument.

High Yield Bond Rates Fall

Through February 10, more than $13 billion of debt with a rating of CCC or lower has been issued, twice the previous record pace at this point in the year. But what is surprising is that the average YTM for the ICE BofA High Yield Index is only 3.97 percent. While this represents a 2.77 percent risk premium over current U.S. Treasury rates, only three years ago the 10-year Treasury yielded 3.23 percent. The current low, or even negative, yields for safe investments has investors chasing riskier investments to increase returns. Another reason for the low yields on junk bonds seems to be that investors believe the COVID-19 slowdown is temporary and the economy will recover quickly as vaccines are more widely distributed. 

GM's Electric Option

A recent Wall Street Journal article discusses GM's managerial option to abandon gas-powered automobile manufacturing and convert to an all-EV product line. In order to achieve this end, GM plans to spend $27 billion by the middle of the decade to convert its plants to manufacture 30 EV models, as well as develop driverless vehicles. Currently, EV vehicles generate only 2 percent of GM's sales and no profits. Because the manufacturing process is so different, GM plans to gut plants, basically revamping everything inside the outer walls. GM's plan is to manufacture only EV vehicles by 2035, a massive change in the company's manufacturing capabilities.

Bitcoin Passes $1 Trillion

This week, the market capitalization of bitcoin topped $1 trillion for the first time. The popular cryptocurrency reached an all-time high of $56,399.99, an increase of 70 percent over the past month. So, what is the future for bitcoin? At this point, analysts are split, with some saying it could reach $200,000 and others arguing that the cryptocurrency is overvalued. One thing is certain: Bitcoin is expanding to mainstream investors, including Tesla, Mastercard, and BNY Mellon. Of course, with this more widespread acceptance, bitcoin's price has become more cyclical, meaning that it is less useful as a diversification asset.