Corporate Finance

In 1990, a new monetary strategy was born, inflation targeting.

Microsoft Corporation prepared its July 20, 2004 press release detailing its plan to pay out $75 billion over the next four years. Cassius King, a senior analyst in the Microsoft treasury department, pondered their imminent decision to 1) pay a one-time special dividend of $3.00 per share, for a total of $32 billion; 2) double the regular quarterly dividend from $0.04 to $0.08 per share, paying approximately $3.5 billion annually; and 3) repurchase up to $30 billion in MSFT shares over the next four years.

We develop a model of lending and borrowing in markets where the lender has no access to physical collateral and where the borrower is heavily capital constrained. Our model of micro loans, which incorporates a) the absence of access to physical collateral, b) peer monitoring, c) threat of punishment upon default, and d) costly monitoring by lenders is used to determine the equilibrium borrowing rates. Monitoring by lenders is shown to be critical for an equilibrium to exist in our model if the maturity of the loan is too long.

The role of private equity in global capital markets appears to be expanding at an extraordinary rate. Morgan Stanley estimates that there are now some 2,700 private equity funds that either have raised, or are in the process of raising, a total of $500 billion. With this abundance of available equity capital, the willingness of private equity firms to participate in "club" deals, and the leverage that can be put on top of the equity, private equity buyers now appear able and willing to pay higher prices for assets than ever before.

Many corporate executives view private equity as a last resort, as expensive capital that should be tapped only by companies that don't have access to presumably cheaper public equity. The reality of private equity, however, is more complex, and potentially quite rewarding, for both shareholders and management. This paper surveys some of the academic work on the costs and benefits of public vs. private equity, contrasting the private equity investment process with its public counterpart and exploring how such a process may add value.

Valuation models are useful tools, but they need to be handled with care. When taking the form of mathematical formulas, they can easily be made to convey a false sense of precision. In particular, selective choice of long-term growth rates and discount rates can be used to justify almost any desired valuation.

This paper compares methods for computing the distribution of loss from defaults in a credit portfolio. The methods are applied in the Gaussian copula framework for credit risk and take advantage of the conditional independence of defaults in this framework. As a benchmark we use vanilla Monte Carlo simulation to estimate the tail probabilities of the total losses of the credit portfolio. The first method to be compared is a recursive algorithm to obtain the exact distribution of the total loss of the portfolio, conditional on observed values for the systematic risk factors.

To understand why developing countries do not automatically benefit from financial globalization, both the need for a minimum institutional quality (the threshold hypothesis) and the possibility of varying volatility of different types of capital flows (the composition hypothesis) have been suggested. This paper contends that the two hypotheses are intimately linked, and provides supportive empirical evidence.