my thread for all corporate finance and academic finance related stuff
today at work we talked about how one would value and sell equity in a person
8-D / :O
today at work we talked about how one would value and sell equity in a person
8-D / :O
quick jot of my thoughts today after a some after-work pints, sorry about structure
here was my proposal:
each individual can be viewed as an asset, one that will produce cash flows over their living existence. corporations are viewed in this way. technically speaking, the cash flows we would be concerned with are those that are available to the owners of the individual (this will become clearer later). so once you cover your living expenses, pay down debt, invest, etc, what is left is your personal free cash flow (FCF).
like corporations, people have capital structures (credit cards, mortgages as debt, possessions as assets - it seems that most people are highly levered but this is just an observation). i haven't worked out the specifics yet, but there are many ways to compute the cost of capital and therefore the discount rate for the FCFs.
the FCFs of the individual are estimated, and discounted by an appropriate factor given their immediacy. the sum of these discounted cash flows is the net present value (NPV) of the individual. however, as mentioned previously, the person has both liabilities and assets. since the liabilityholders have a certain claim on the individual, the total liabilities must be subtracted from the given NPV. this gives us the theoretical value of the individual's equity. the underwriter/issuing bank of the person's equity would likely start bidding near this value, in order to maximize the cash for the person selling their equity.
from there, we can consider more practical things. why would one want to sell their equity? one example that instantly sprang to mind is if they could not afford college/university and were accepted to a good school, one might endeavour to sell their personal equity. this is perhaps overly simplistic, but in any situation where someone needs personal liquidity (buying a car, a house?) they could raise capital with this method without taking on debt. in essence, giving people the same capital access that corporations have. if they have shares outstanding, they could use a rights issuance to raise more money.
in my mind, it is sort of like a loan that does not guarantee any return (for the buyer), but can giver the buyer more flexibility in terms of voting rights, claim on residual assets, and dividends. theoretically a person could sell themselves off entirely and have no voting rights, e.g. be legally bound to follow the command of their equityholders. but here are many ways in which the person could retain control over their life, for instance by only selling a minority stake or selling non-voting rights.
the person could buy out their equityholders if they came to mutual agreement. however it is likely that these securities would be rather illiquid and held by a few institutions or people... unless we packaged them up, assigned them ratings, and sold them off. bahahaha.
dirty? very much so.
here was my proposal:
each individual can be viewed as an asset, one that will produce cash flows over their living existence. corporations are viewed in this way. technically speaking, the cash flows we would be concerned with are those that are available to the owners of the individual (this will become clearer later). so once you cover your living expenses, pay down debt, invest, etc, what is left is your personal free cash flow (FCF).
like corporations, people have capital structures (credit cards, mortgages as debt, possessions as assets - it seems that most people are highly levered but this is just an observation). i haven't worked out the specifics yet, but there are many ways to compute the cost of capital and therefore the discount rate for the FCFs.
the FCFs of the individual are estimated, and discounted by an appropriate factor given their immediacy. the sum of these discounted cash flows is the net present value (NPV) of the individual. however, as mentioned previously, the person has both liabilities and assets. since the liabilityholders have a certain claim on the individual, the total liabilities must be subtracted from the given NPV. this gives us the theoretical value of the individual's equity. the underwriter/issuing bank of the person's equity would likely start bidding near this value, in order to maximize the cash for the person selling their equity.
from there, we can consider more practical things. why would one want to sell their equity? one example that instantly sprang to mind is if they could not afford college/university and were accepted to a good school, one might endeavour to sell their personal equity. this is perhaps overly simplistic, but in any situation where someone needs personal liquidity (buying a car, a house?) they could raise capital with this method without taking on debt. in essence, giving people the same capital access that corporations have. if they have shares outstanding, they could use a rights issuance to raise more money.
in my mind, it is sort of like a loan that does not guarantee any return (for the buyer), but can giver the buyer more flexibility in terms of voting rights, claim on residual assets, and dividends. theoretically a person could sell themselves off entirely and have no voting rights, e.g. be legally bound to follow the command of their equityholders. but here are many ways in which the person could retain control over their life, for instance by only selling a minority stake or selling non-voting rights.
the person could buy out their equityholders if they came to mutual agreement. however it is likely that these securities would be rather illiquid and held by a few institutions or people... unless we packaged them up, assigned them ratings, and sold them off. bahahaha.
dirty? very much so.
but i look forward to reading this when i have time! (i have a meeting in five minutes, then i'm busy all night.)
as an econ dude you'll be familiar with the concepts.
:s
icelandic banks are so hot right now
i wanna work for one
i wanna work for one
finally read this. estimating the future stream of cash flows for an individual seems extremely difficult.
there are also inherent principal-agent problems here. :)
kinda cool to think about, i guess. but i think microfinance makes more sense.
there are also inherent principal-agent problems here. :)
kinda cool to think about, i guess. but i think microfinance makes more sense.
well it's the same in equity financing for corps. one bank values the corp to sell it, other banks value it for other investors. everyone tries to maximize their return.
yeah, okay.
money is the devil.
pshaw
I love $$$, I love bitches, I love life.
question: google finance charts are in percent for me. know how to change it to price?
Can you email me a screenshot?
sure.
--
i have a good amount of money tied up in bonds--TIPS and investment-grade corporate debt. i'm glad that these are doing better recently, because i'm looking to slowly liquidate.
equity looks like it's been doing pretty well lately, too.
what gives?
--
i have a good amount of money tied up in bonds--TIPS and investment-grade corporate debt. i'm glad that these are doing better recently, because i'm looking to slowly liquidate.
equity looks like it's been doing pretty well lately, too.
what gives?
^ my charts are in both percent and price. weird.
apparently it's because i had two securities on one chart
i am not happy about equity valuations. it's getting scary out there. lots of really marginal stuff coming to market too - not just in IPOs and follow-on offerings but also on the debt side with junk super frothy.
what if that's the future? i've been thinking about real growth opportunities lately. what if we've already gotten all the low hanging fruit, and all that is left is scraps?
maybe that's a good research idea for my dissertation.
maybe that's a good research idea for my dissertation.
i agree that in north america / western europe there may be limited gains to productivity and thus growth drivers will resort to demographics (which are unfavourable in many instances... except healthcare).
over and above that, corporate net profit margins are well above trend. i don't have a decomposition handy (and really, i need it), but i read that much of it is due to a considerably lower interest burden due to the all-time-low cost of borrowing. so in the event of real rates ticking up, or the competitive environment otherwise moving unfavourably, real earnings will fall.
various equity valuation metrics such as the cyclically-adjusted earnings yield (which would incorporate some of the margin mean reversion above), tobin's q ratio, ratio of market cap to GDP, etc. are generating signals that the equity market is significantly overvalued.
i am not much of a macro guy so you may be able to chime in here.
over and above that, corporate net profit margins are well above trend. i don't have a decomposition handy (and really, i need it), but i read that much of it is due to a considerably lower interest burden due to the all-time-low cost of borrowing. so in the event of real rates ticking up, or the competitive environment otherwise moving unfavourably, real earnings will fall.
various equity valuation metrics such as the cyclically-adjusted earnings yield (which would incorporate some of the margin mean reversion above), tobin's q ratio, ratio of market cap to GDP, etc. are generating signals that the equity market is significantly overvalued.
i am not much of a macro guy so you may be able to chime in here.
some nice blog posts to read (they have links)
http://greenbackd.com/2013/04/08/the-equity-q … me-losses/
http://greenbackd.com/2013/03/21/sp-500-opera … expensive/
http://greenbackd.com/2013/04/03/how-accurate … ting-tool/ -- good discussion in comments on this one.. need to read them
http://greenbackd.com/2013/04/01/aqrs-cliff-a … hiller-pe/
http://greenbackd.com/2013/03/25/warren-buffe … ck-market/
http://greenbackd.com/2013/04/08/the-equity-q … me-losses/
http://greenbackd.com/2013/03/21/sp-500-opera … expensive/
http://greenbackd.com/2013/04/03/how-accurate … ting-tool/ -- good discussion in comments on this one.. need to read them
http://greenbackd.com/2013/04/01/aqrs-cliff-a … hiller-pe/
http://greenbackd.com/2013/03/25/warren-buffe … ck-market/
I am limited to trading only Mutual funds and preclearing all ETFs/Stocks. I cannot speculate. What would you guys recommend as good long term buys?
so you have a 30 day hold on stocks?
if you just want to buy and hold, i would look at RWX, VWO, VTI, EWJ, those combined make up about 30% of my equity portfolio
if you just want to buy and hold, i would look at RWX, VWO, VTI, EWJ, those combined make up about 30% of my equity portfolio
NEstor: Correct. I'll look into this.
i would just put your cash into a diversified group of ETFs and as you see attractive opportunities >30 days sell down your ETF exposure and allocate to equities.
welp, what i hoped for didn't work out. the bonds market really soured over the last three months. :(
what's it like to work in finance, nestor?
nestor, can you fill out all of the ridiculous forms to transfer money out of the five retirement funds I've accumulated over the years? or tell me about a loophole so I can just be rolling in retirement money in my late 20s?
lucas > it's a tough job particularly at the start (with respect to hours) but it really does grow on you. i thought i would be heading back to academia but after various talks with friends who are on the phd route i am plenty happy with the track i'm on and the learning opportunities / free time i have to work on my own projects. i can get into whatever detail you're looking for (if something more specific).
asemi > i know nothing about u.s. personal taxes! sorry.
asemi > i know nothing about u.s. personal taxes! sorry.
fuuuck I forgot how country-dependent that would be. I wasn't serious anyway I just wanted to lament the ridiculous paperwork involved with dumb life shit like managing retirement money.
if my recent canoeing trip has reminded me of one thing, it's how often you just need to get out of the canoe, stand in the muck, and pull the boat over a pile of rotting logs. you might get a couple leeches on your feet, but at least you're moving out of the swamp!
ok, weird analogy, that's all to say i'd just get all the paper in one place and then dedicate an afternoon to it. no better way.
ok, weird analogy, that's all to say i'd just get all the paper in one place and then dedicate an afternoon to it. no better way.
I was hoping you were saying I should go on a camping trip and get leeches and forget about money, because that's what I'd like to do.
yeah, that's what i was thinking at first, too
damnit, my TIP bonds ETF has been bouncing around between $110 and $113 for the last two months. i wish it would bounce out of this rut! i don't think i'm much of an investor.
preserving capital is an infinitely better outcome than permanently impairing it, don't sweat it
you mean that i should ride it out as long as i can? that's what i'm trying to do...
the market is totally broken. i'm convinced more than ever of the madness of qe infinity... on the other hand, lr's TIPS fund made a little money this week
luckily i only own 60 shares of LQD and 60 shares of TIP, so both being down about $10 from what i paid, i'm only out $1200. but i've been earning all those dividends, so there's that.
Still can't get rid of MSFT. Oh well. :/ I'm out of the trading game.
For what it's worth, I like MSFT (as an investor, not as a consumer). It is really cheap, and there is an activist investor in place where your cost is not entirely dissimilar to theirs. But if your whole portfolio is MSFT, I would diversify :)
we're at a 7 month high for LQD!