Day 88 in MIT Sloan Fellows Class 2023, Financial Management 8, Summary of business cases and financial theories - 3

1. Molycorp
   • Concepts
     • Convertibles
       • bond/stock + option to convert into common stock
       • option works with conversion ratio
     • Signaling to market
     • Pecking order
       • Internal funds
       • Debt
       • Equity
     • Working capital calculation
       • +A/R
       • +Inventory
       • -A/P
       • -Accrued Expenses
   • Key findings
     • Investors can convert one $1000 FV into 20 shares.
       • Conversion ratio of 20
       • Report conversion price 1000/20 = $50 share
       • Similar to stock option
       • Convertible prior to maturity(>bond value or conversion)
       • Call protetion period
       • Lower coupon rate
     • Why use convertibles?
       • High R&D and startup: high degree of information asymmetries
       • Volatile cashflow: high likelihood of financial distress
     • Agency cost
       • When a company has excess cash
       • If No pressure on Molycorp's management(actually, a lot). Agency problem such as buying an expensive building and private jet. 

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2. Intel
   • Concepts
     • Payout policy for excess of cash
       • Product market policies 
         • Accelerate growth
         • Diversify
       • Financial policies
         • Pay down debt
         • Increase dividends
         • Repurchase shares
       • Dividends or share repurchases 
         • Repurchase is taxed as capital gains
         • Investors should prefer share repurchases over dividends
       • The meaning of dividends payment
         • Good signal for market
       • Share repurchases three types
         • Open market repurchases
         • Fixed price tender offer
         • Dutch auction tender offer
   • Key findings
     • If M&M world, paying dividends is a zero NPV transaction
     • Payout policy affects the following things
       • Tax payment ( tax on dividends > tax on capital gains)
       • Financial distress
       • Signaling
       • Agency problem
     • Post Bush, dividends are no longer taxed at personal income tax rate
     • Sustainable growth rate: ROE * (1-dividend payout) = NI/NW * (1-payout)
     • NW grew faster than ROE because Intel did not have any debt and payout ratio.

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     • Intel has around 30-40% cash of assets.
     • But given future investment needs, they may not need so much cash.
     • Dilute other stocks when someone buy stocks - poison pill
     • Covertible bonds don't make sense for Intel in this case.