Required preferred stock yield
The required yield of a preference share is calculated like the value of a debt:
= Dividend/Market value of the stock = 100 x 0.15/120 = 0.117.
Required return on common stock
Since the buyer of a simple stock counts not on a fixed income, but on a share in the company's success, it is difficult to estimate the profitability of this security.
First of all, it is necessary to determine from what point of view the evaluation of profitability is carried out - from the perspective of the continuing business ( a going concern value ) or from liquidation value. To calculate the profitability, the current value of future cash flows generated by the share should be correlated with today's required share price (K,):
Theoretically, it is clear that the market price, in principle, is equal to today's value of all dividends that will flow from today to infinity:
where PV is today's value; div - dividends by years.
How can we estimate the endless cash flow of dividends? It can be assumed that dividends will constantly grow with a constant rate, which, it can be assumed, will grow in proportion to the retained profit:
where g is the rate of dividend growth; - income per share; - the market price of a simple share; - the proportion of retained earnings in the net profit of the company.
This approach does not take into account the sale of new shares and new borrowings.
In the early 1960's. American scientist Myron Gordon has developed a model for valuing stocks:
where - the current dividend rate.
The formula does not contradict common sense: the shareholder either receives dividends, holding the growth of the firm and the cost of ordinary shares, or allows the company to grow at the expense of retained profits and thus increase the value of shares. But this is true only for the theoretical assumption that the growth rate of the firm corresponds to the proportion of retained profits. Alas, this is not always the case.
How to determine the required yield
Summarizing the methods discussed in this chapter, you can suggest calculating the acceptable value of the required rate of return (in percent) as a weighted average of the three components:
1) the cost of debt () (weighted by the share of borrowed capital in the firm's liabilities);
2) weighted by the corresponding share of the value of preferred shares ();
3) weighted return on common shares (). This technique gives satisfactory results at normal levels of profitability, which is typical for most firms. It is simple and logical. It reflects well the changes in the structure of the firm's liabilities. With moderate borrowing, it also gives good results.
This model is not usable:
- with strong deviations in the capital structure or the company's profitability from the average market values, which is typical for the original businesses and venture projects;
- with strong deviations of project risk from moderate. The concept of the required yield is extremely important in making financial decisions. You can apply this or that theoretical model, but decision-makers should be guided not only by calculations by formulas or by industry-average values. This vital indicator for the firm should be clarified, refined and clarified ... On how well it will be chosen, it depends whether the firm will get involved in the unprofitable scam or whether its chance will not be missed. However, not all values of a company at risk are reduced to calculating the required profitability.
The economically important values of firms are numerous. It is difficult to agree with specialists who limit them only to those values that are of interest to insurers. Many values of the company, at first glance, are ephemeral, cost real money. Therefore, the risk manager should raise the issue of values as widely as possible. In this section we briefly outline the main of them.
Each risk exposure, i.e. exposure to risk, has at least three dimensions: 1) the type of value under threat; 2) the nature of the hazard causing the exposure; 3) the magnitude of the possible and actual financial and other consequences. Their combination is visually represented in the form of a three-dimensional space, which can be used for a comprehensive description of the risks of this organization. These measurements can be extremely intertwined in each specific case, and their connection, responsibility for covering losses and legal responsibility for the consequences can be quite unobvious. In addition, the classification of expositions of the firm should take into account another dimension, namely the levels: intrafirm, non-domestic, domestic, foreign risks. However, at the stages when the disaster has not yet occurred, the risk manager must understand each of these dimensions.
A. Values at risk (types of exhibited valuables):
- Market position;
- financial stability;
- tangible assets (property)
- intangible assets (know-how, experience, training, brand, trademark, rights, privileges, goodwill, reputation);
- information, knowledge and experience;
- income (future, missed, new);
- adjusted cash flows;
- the structure of capital and property (equity portfolio);
- resources and access to them
- a well-equipped external environment;
- links to suppliers and consumers
- well-established and well-equipped technologies;
- a trade mark (brand);
- key personnel
- a team that has worked together
- good organization;
- equipped and tested logistics;
- databases and well-documented workflow;
- Experienced and well-managed management
- corporate values and culture;
- freedom from responsibility;
- the image and quality of life;
- the status of the members of the organization.
The list is likely to be incomplete, and not strictly logical. The enumeration sequence here does not speak of the importance of value. This is only the most general formulation of the exhibiting values. When switching to different levels of risk analysis and the sources of their emergence, the value phrases acquire their own specific features.
B. Sources and types of risk.
In one of the previous paragraphs of this book, many approaches to the classification of risks have already been cited, which can be summarized in the following list:
a) external risks:
• Competition (membership in international organizations, international standards, traditions and practices),
• The risks of payment systems,
• Risks of the financial system,
• risks of the insurance system,
• bank risks,
• legislative risks (insufficiency and low quality of legislative acts),
• forensic arbitration risks,
• Risks of enforcement of judgments;
b) intra-organizational risks:
• operational and technological,
• Administrative and management,
• management style,
• infrastructure (the internal environment of the organization),
• engineering and intellectual (research and development, information),
• motivational and cultural,
• Individual (personal interests of each person),
• group (the interests of informal groups),
• humanitarian-social (nostsotsialisticheskaya mentality),
• corporate (relations of owners, managers and employees).
Q. Levels of risk management:
• The individual;
• informal group;
• The firm;
• open joint-stock company
• regional economy;
• National economy;
• market niche;
• sphere of interests;
• The global economy.
Each level has its own risk dynamics for the structure and subsystems of the firm, for different types of risk mapping, for life cycle stages pulsing in the firm, for strategic alternatives, for scenarios of events, etc. In the practice of identifying, systematizing, analyzing, evaluation, mapping and ranking of risks, the risk manager sometimes has to look for a point of view that can differ materially from this scheme, but correspond to the specific needs of the firm. In other words, the construction of a universal classification of risks (consistent, sufficiently deep and detailed, applicable to any firm in any situation, that is, corresponding to the natural nature of the risk phenomenon) remains an as yet unsettled task of the theory. This problem still awaits its "Mendeleyev", which will build a systematization of risks, comparable in its conceptual power with a periodic system of chemical elements. Nevertheless, the proposed model is quite applicable for practical needs of building risk management services of the firm.
The success of risk management depends on the tools that the risk manager has in his particular economic, legal and organizational environment. In the most general form, risk response tools can be divided into four classes: a) the impact on the source of risk (attacking measures); b) impact on the external environment of the organization ( environmental measures ); c) the impact on the organization itself (object, subject) exposed to risk (adaptation); d) combined effects on the source, environment and organization. Then these impacts can be systematically detailed on the elements of which the source, environment and organization consist.
Empirically, the risk manager's arsenal can be represented by the following list:
1) prevention of risk;
2) risk aversion;
3) protection and physical protection of values;
4) impact on the source of risk;
5) reducing the time spent in hazardous areas;
6) conscious and unconscious acceptance of risk;
7) duplication of operations, objects or resources;
8) Reduction of dangerous behavior;
9) reduction in the magnitude of potential losses;
10) reduction in the amount of actual losses;
11) monitoring of information (espionage, classification, leakage, disinformation, rumors, etc.);
12) technical monitoring of the situation;
13) the distribution of risk by different agents;
14) downscaling or consolidating risk;
15) distribution of exposures in space;
16) the separation of exposures over time;
17) isolation of dangerous synergistic factors from each other;
18) insurance transfer of risk;
19) non-insurance transfer of risk (contractual, procedural, de facto through reservations and warnings);
21) reducing the likelihood of unwanted events;
22) shorter exposure time;
23) asset diversification;
24) balancing of assets and liabilities;
25) financial instruments for hedging risks;
26) financial engineering;
28) games weak "(" kamikaze "," shahidism ", etc.),
30) the development of a network of special relationships inside and outside the organization;
31) charismatic management;
32) moral conditioning;
33) imitation of the desired;
34) procedural configurations;
35) flexible technologies;
36) socio-psychological measures;
37) development of corporate and national culture;
38) use of intermediaries;
39) use of arbitrators;
40) a phased audit;
41) training and staff training;
42) the use of explicit and hidden observers;
43) breaking down into stages, tranches, stages, etc .;
44) manipulating the boundaries of the organization and their permeability;
45) setting limits;
46) changing the risk management horizon;
47) Pledges and hostages;
48) control over resources;
49) damage to the source of potential danger (sabotage, etc.);
50) Distraction on a useless object;
Fig. 13.8. Graphical model of the company's overall risk management process
52) the development of a purposeful image;
53) a specific assignment of responsibilities;
54) structural configurations (commissars, decimvirs, triumvirs, linear responsibility distribution maps);
55) the establishment of laws and by-laws (jurisprudence);
and other methods specific to the organization.
The success of detection and monitoring of risks depends on the symptomatology of early warning used. One of the most popular lists of symptoms of early warning of the problems of the firm was published by the order of the American Association of Bankers John Barricman in 1993. This list has become a kind of classic. He is often quoted and inserted into publications on banking. The only drawback of this list is that it is devoid of any comment. Therefore, it is suitable only for sufficiently qualified diagnosticians and requires from them extensive and in-depth knowledge from different areas. The list of symptoms given in the appendix is based on the Barricrman list, which has been significantly supplemented by us and partially supplied with our brief comments. Even such a modest commentary can significantly expand the range of individuals who can apply the list for early risk diagnosis and monitoring. Although initially the list was drawn up for bankers monitoring the state of their clientele in order to monitor credit risk, our experience shows that it is suitable for both diagnosing partners and for self-diagnosis of the firm. Since in this case the dynamics of development and changes are more important than just the current state by any criterion, observers should maintain databases in which it is useful to record information but to each criterion separately, relating to different time periods. The symptoms and comments to the company that are common to any firm are suitable for any type of commercial organization, although some may require clarification.
The risk management scheme in the organization is shown in Fig. 13.8.
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