Why Study Finance?

For those outside Finance, it is often viewed as a necessary evil that is irrelevant to other areas of the corporation such as technology. A recent survey by CFO Publishing discusses nonfinancial risk for technology companies. These risks include items such as the ability to hire and retain quality employees, performance failure of vendors and suppliers, the breach of the company’s electronic or online data, and the failure to meet targets for business/customer growth. While you might think that such risks have no relation to Finance, there is in fact a relationship to Finance for every one of these risks. As Bob George, the CFO of the aerospace and defense components manufacturer Esterline Corporation, states “Even though we label these nonfinancial risks, ultimately they will impact the company’s balance sheet and income statement in very significant ways. The financial community must be active in those processes, even if they’re not influencing them on a day-to-day, decision-making basis.” No matter what area of a corporation you examine, every risk or opportunity has a financial impact that will ultimately affect the success or failure of a business.

When Receivables Rise

One way that many companies have increased cash conversion cycles is to increase the accounts payable period. While this helps the company, it also means that the supplier now has a longer accounts receivable period. Large companies will often unilaterally inform small suppliers that they will increase the payables period. For small companies, the resulting increase in the receivables period can be devastating. During the recent recession, many small suppliers accepted the new terms forced on them because they were afraid of losing business. But many small suppliers are starting to fight back. For example, when one company was informed by a customer that they would be increasing the payables period from 30 days to 45 days, the supplier stated that their quote was based on 30 days, not 45 days. An increase in the payables period would have to result in a 10 percent price increase. The payables period went back to 30 days. Although many small suppliers feel trapped by large customers, there are often ways to reach a compromise that satisfies both parties.

Investor Sentiment

An indicator that can be used in behavioral investing is investor sentiment. Recently, TD Ameritrade and Fidelity Investments started indices based on the investor sentiment of the account holders at the respective firm. Many traders view investor sentiment as a contrarian indicator, that is, if sentiment is strongly positive, bet against the market, and if sentiment is low, bet on the market. Recently, most investor sentiment indicators are showing a high level of investor confidence. So, is the market ready for a downturn?

It's Market Efficiency By A Length

Five years ago, famed investor Warren Buffett placed a bet with the founders of the Protégé Partners hedge fund that the S&P 500 would outperform a hedge fund index chosen by Protégé partners over a 10-year period. At its heart, the bet was about market efficiency, that a group of most well compensated investment gurus could not outperform the broad stock market. At the five-year mark, the S&P 500 is up 8.69 percent, while the five hedge funds picked by Protégé are up only .13 percent. This marks the first time in the past five years that the S&P 500 is ahead of the hedge funds. The winner gets to choose the charity that will receive the $1 million plus prize. What does this bet mean for you? A former investment banker gives her view.

The Driverless Car And Capital Budgeting

With any capital budgeting process, estimates of sales, costs, etc., are important, as is the recognition that there can be significant external forces that affect your estimates. A recent article in Forbes discusses the side effects of Google's driverless car. For example, governments will lose revenue from the elimination of speeding tickets, red light violations, and other traffic tickets, but may save since fewer police officers will be needed to oversee traffic violations. Gasoline sales would plummet, hospitals would have fewer patients, and auto and health insurance premiums would fall drastically since there would be fewer accidents. In any capital budgeting process, you should be aware of external factors that could affect your projections for a project since these factors can affect your analysis. Of course, you also need to be aware that there may be disagreements in these projections. For example, the article assumes that if driverless cars do become available that auto sales will fall since there will be a fleet of cars used for everyone, not private ownership of an individual car as is the current model. There is a good chance that the fleet option is idealized and that even with driverless cars, there will still be a large number of individual owners. In any case, in the textbook we discussed using scenario analysis for base-case, best-case, and worst-case projections. Including external factors such as the possible changes caused by driverless cars is another scenario that could be examined in any industry affected by the driveless car.

Inflation In The Afterlife

Our textbook discusses how to deal with inflation in cash flows, namely, discount real cash flows at the real interest rate or discount nominal cash flows at the nominal interest rate. Since our focus is corporate finance, we do not deal with possible causes of inflation. A recent presentation by economist Yoram Bauman may lead to a better understanding of hyperinflation in the afterlife.

Nokia Stock Down On Dividend Cut

Finnish cell phone maker Nokia is expected to suspend its annual dividend payment. The dividend, which Nokia had been paying for over 20 years, cost the company €750 million ($996 million) per year. The company stated that the savings would give it flexibility. Nokia has €4.4 billion ($5.87 billion) in cash, a 22 percent decrease from the previous year.  The announcement resulted in an 8.2 percent stock price decline.