Misinformation About Capital Management
Mercury Capital Analytics
Corporate Finance White Paper
Misinformation About Capital
Management and Value Creation
The quality of corporate financial management has deteriorated generally over the past few decades. Practitioners have become so enamored of engineering complex new investment instruments, and legal structures, as well as with accounting legerdemain, that attention has been diverted from the theoretical foundations which should help the practitioner accomplish his most critical function, viz. assist in maximizing the
Value of the Firm.
Part of the weakening of the practice of corporate financial management has to do with recent distortions in the data normally used in making such fundamental calculations as
Weighted Average Cost of Capital. Another cause is the lack of uniformity in following the processes involved in such measurements. But another cause of concern is the
1
tendency to either ignore the fundamental tenets of the profession, or to demonstrate a puzzling ignorance of those tenets.
A Deloitte Global Services study, for instance, indicates that more than half of CFOs believe it will be easier for them to service debt in the near future. This suggests, perhaps, a lack of awareness of what is actually happening in the market for debt capital.
The fact is that, globally, $11.5 trillion of debt will come due in the next five years, half of it in the U.S., and half of that in the financial services industry. This is one reason we see large stockpiles of cash, especially in the financial services industry. Over the same fiveyear period government debt is expected to increase annually by 9% to 11%. This means that the demand for debt capital will likely increase significantly, and, with it, interest rates. More of a concern than interest rates, however, will be capital availability itself.
Many companies simply will not be able to find loans. It looks like many CFOs are going to be surprised.
More than half of CFOs believe it will be easier
Corporate Finance White Paper
Misinformation About Capital
Management and Value Creation
The quality of corporate financial management has deteriorated generally over the past few decades. Practitioners have become so enamored of engineering complex new investment instruments, and legal structures, as well as with accounting legerdemain, that attention has been diverted from the theoretical foundations which should help the practitioner accomplish his most critical function, viz. assist in maximizing the
Value of the Firm.
Part of the weakening of the practice of corporate financial management has to do with recent distortions in the data normally used in making such fundamental calculations as
Weighted Average Cost of Capital. Another cause is the lack of uniformity in following the processes involved in such measurements. But another cause of concern is the
1
tendency to either ignore the fundamental tenets of the profession, or to demonstrate a puzzling ignorance of those tenets.
A Deloitte Global Services study, for instance, indicates that more than half of CFOs believe it will be easier for them to service debt in the near future. This suggests, perhaps, a lack of awareness of what is actually happening in the market for debt capital.
The fact is that, globally, $11.5 trillion of debt will come due in the next five years, half of it in the U.S., and half of that in the financial services industry. This is one reason we see large stockpiles of cash, especially in the financial services industry. Over the same fiveyear period government debt is expected to increase annually by 9% to 11%. This means that the demand for debt capital will likely increase significantly, and, with it, interest rates. More of a concern than interest rates, however, will be capital availability itself.
Many companies simply will not be able to find loans. It looks like many CFOs are going to be surprised.
More than half of CFOs believe it will be easier