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The rich scholarship on the politics and finance of sovereign debt tends to take for granted debt’s most basic form: as a private contract. Nevertheless, legal challenges have been central to the contemporary evolution of sovereign debt dynamics thanks to litigating strategies rendered possible by — mostly standard — contractual stipulations in international sovereign bonds. By using a debt-as-private-contract lens, the paper highlights how exposed sovereign debtors present themselves to these global transactions, how foreign sovereign bond contracts anchor otherwise footloose finance in particular jurisdictions, and how contractual changes sparked by outlier cases of protracted litigation or recent turbulence in debt exchanges have been key to global efforts to reform debt governance around market-based parameters. The legal battle between Argentina and its holdout creditors in US courts is analyzed here to illustrate these dynamics given its significance in sparking contractual revisions. Ultimately, it is clear that credit and contract are inextricably linked. Contractual evolution is revealing of the legal risks taken on by sovereign debtors and their creditors in private markets. The cost of debt hence may go beyond relatively predictable financial calculations.

Seasoning startups can afford to collect debt whenever they start creating positive cash, build up worthy collateral assets, and soften information asymmetries. Leveraging growth with debt may increase it, albeit with a correspondent risk growth. Capital budgeting metrics, represented by Net Present Value or Internal Rates of Return, incorporate debt underwriting. This analysis is preparatory to Modigliani & Miller proposition II: as the proportion of debt in the company’s capital structure increases, its profitability, proxied by ROE increases in a linear fashion. An empirical case is provided, starting from a real balance sheet.

The problem of increasing investment attractiveness of the agrarian business rises in work. Financial stability is one of the key barriers. To improve it, the methodology for estimating the cost of capital is supplemented with a range of developed econometric models for diagnosing the impact on the financial results of own and borrowed sources of fixed and circulating funds. The principal difference of the proposed approach lies in a qualitatively different instrumental support of strategic decisions on capital optimization in the agricultural business.

This book presented investment risks associated with the sub-Saharan African clean energy industry and an overview of risk mitigation strategies and innovative financing schemes available to public and private players, while focusing on the power and clean cooking sectors and specific energy resources. Starting from this basis, we identified the following areas for future work: (i) the quantification of investment risks; (ii) the selection of risk mitigation actions and their impact on the cost of capital; (ii) the exploration of additional sectors and energy resources; (iv) an in-depth analysis of subsidy reforms.

In this chapter, we are going to jump between San Francisco, The Gambia and the UK to learn from Riders for Health’s journey to a debt guarantee. In the last chapter, we looked at innovative ways grant funders can think about using grant capital strategically, and back in Chapter 4, we discussed the importance of collateral and how to use customer orders and invoices as collateral to access debt financing. In this case, Andrea and Barry Coleman from Riders for Health use a debt guarantee from a foundation to access debt and reduce their cost of capital.

In the previous chapter we studied equilibrium investment and financing decisions in the case of perfect competition in the firm’s product market. A counterfactual result of the model is that the wedge between the expected firm’s profitability and the cost of capital is entirely driven by the size of investment adjustment costs. Namely, the larger \(||\theta \left (I_{t}\right )||\), the wider is the spread between the return on invested capital (RoIC), which is the ratio between operating earnings and the total capital stock, and the firm’s WACC, holding everything else constant.

The study examines the problem of agency conflicts and their impact on the value of a business and the welfare of shareholders. This problem may lead to a decrease in the business capitalization, become the basis for unfriendly acquisitions by competitors and foreign capital, may become the reason for an increase in the cost of debt financing, thus affecting the overall financial stability and solvency of the company. The study offers an updated model for evaluating the quality of financial management of public joint-stock companies, based on EMR, TSR, FARR, SGR, EQ/TA, CR and ND/EBITDA indicators as the tool for eliminating and preventing agency conflicts that affect the business value; its efficiency is demonstrated basing on the data obtained from the largest corporations in Russia. Evaluation of the model effectiveness shows a stable direct correlation between the scores obtained using the model and the future indicators of a business value, which testifies to the appropriateness of using the model in the context of the Russian economic environment.

Climate change will drastically redraw coastlines threatening capital cities, economic growth, and livelihoods. These risks might seem far in the future, but on our current path, three meters of sea level rise (SLR) is plausible by 2100, which would permanently submerge the equivalent of 22 Singapores of urban real estate from just 20 APAC capitals and economic hubs. Central Banks and regulators around the world have formed an 80+ member strong coalition to prepare for such systemic risks due to the clustering of assets and people in vulnerable locations. With the financial sector waking up to these significant tail risks, valuation adjustments are inevitable. This is not about natural capital accounting but real risk adjustments; the same way leasehold property is afforded a lower valuation compared to freehold assets, SLR will have a clear downward impact on valuations in coastal areas as the permanent loss of land will shorten the lifespan of all assets located there. As such locked-in threats question the going concern status of these assets, this should lead to the re-assessment of discount rates, terminal values, capital adequacy ratios, and the cost of capital, which will all affect sovereign and credit ratings as well as equity or project valuations. However, although chronic risks from sea level rise are recognized, there is still no consensus on the path forward regarding their assessment or valuation, which has led to a negative finance feedback loop. This chapter delves into the magnitude of these coastal threats and their ability to trigger systemic shocks. We explain why assessing them is important, how to start assessing risks facing coastal assets or portfolios, and why we should re-value today’s assets.

The previous chapter introduced the reader to Markowitz mean-variance analysis and the Capital Asset Pricing Model. The cost of capital calculated in chapter “Debt, Equity, the Optimal Financial Structure, and the Cost of Funds” assumes that the cost of equity is derived from the Capital Asset Pricing Model and its corresponding beta, or measure of systematic risk. The Gordon Model, used for equity valuation in chapter “The Equity of the Corporation: Common and Preferred Stock,” assumes that the stock price will fluctuate randomly about its fair market value. The cost of equity is dependent upon the security beta. In this chapter, we address the issues inherent in a multi-beta or multiple factor risk model. The purpose of this chapter is to introduce the reader to multifactor risk models. There are academic multifactor risk models, such as those of Cohen and Pogue (1967), Farrell Jr. (1974), Stone (1974), Ross (1976), Ross and Roll (1980), Dhrymes, Friend, and Gultekin (1984), Dhrymes, Friend, Gultekin, and Gultekin (1985), and Fama and French (1992, 1995, 2008). There are practitioner multifactor risk models, such as Barra, created during the 1973–1979 time period; Advanced Portfolio Technologies (APT), created in 1987; and Axioma, created in the late 1990s and gaining practitioner acceptance in the 2000–2019 time period. The former academicians who created these practitioner models are Barr Rosenberg, Andrew Rudd, John Blin and Steve Bender, and Sebastian Ceria. We will introduce the reader to the practitioner models and their academician creators in this chapter. Which models are best? We, at McKinley Capital Management, MCM, have tested these models. None of the models are perfect, but the models are generally statistically significant when the statistically significant tilt variables of chapter “Risk and Return of Equity and the Capital Asset Pricing Model” are used for portfolio construction. In this chapter, we discuss the MCM Horse Races of the 2010–2019 time period to test stock selection within the commercially available multifactor risk models.

Valuation is being talked about everywhere. Finance experts, CPAs, investment bankers, and business consultants are discussing the advantages and disadvantages of discounted cash flow (DCF) methods since years. This book takes part in the discussion, and intends to make a theoretical contribution to it.

The developing rivalry between American and Chinese capital likely compromises the future development of Global Liquidity. This threat could result in a new focus on regionalism that defines exclusive areas of US and Chinese influence. The demise of the Bretton Woods system, paradoxically, has resulted in greater use of the US dollar in the international economy. China’s weakness is that she leans too heavily on the US unit and now badly needs to internationalise the Yuan. China’s financial underdevelopment is a risk for World financial markets, which have become hugely procyclical, partly as a result. The deindustrialisation of the West has emphasised the capital distribution and refinancing dimensions of financial markets, where the capacity of capital outweighs the cost of capital. Consequently, Central Bank liquidity provision and safe asset are critical for further financial stability. Is this Peak Liquidity?

This chapter looks at the profound transformations which are currently shaping the energy sector with the aim of providing a better understanding of their potential implications for investors, asset managers and industrial stakeholders at large. The analysis starts with an overview of the global energy balance and its evolution over time, then highlights the relevant changes taking place in all fuels, from the shale gas revolution to the rapid expansion of renewable technologies and finally focuses on the electricity industry. The latter in particular deserves specific attention because of its leading role in all decarbonisation scenarios and its greater impact on the whole energy sector. Therefore, the chapter looks at the evolution of the electricity industry and at the key trends that are driving its economic fundamentals, investment opportunities and market strategies. Moreover, the study highlights how Europe’s largest utilities are responding with different business models and technological solutions to the challenges and opportunities provided by all these radical transformations. The evidence is not clear yet as to which of these models will be better suited to compete in this new environment and prospects for investments in the energy sectors vary widely according to the considered target and time horizon. Finally, the analysis concludes that the expected value of any investment will be significantly affected by changes in climate policy (e.g. carbon targets), market design (e.g. capacity mechanisms) and regulation (e.g. the regulated cost of capital).

The global financial crisis brought an unprecedented increase in public spending, which helped to stabilize the banking sector, but in many countries changed the market structure, incentives to take risks, cost of capital and competitive conditions. The post-crisis new resolution framework was motivated by the need to limit and control public spending, but its implementation showed a mixed picture. Thus, the aim of this chapter was to compare different restructuring and resolution programs for large banks, based on selected case studies. For the bailout tool, Deutsche Bank, the ING Group and the Royal Bank of Scotland (RBS) are compared. Then, selected resolution cases led by the Single Resolution Board (SRB) and the National Resolution Authorities (NRA) are compared, with an aim to analyze how successful was the restructuring of large banks under the bailout and bail-in regimes.

The cost of longevity guarantees of traditional annuity products has increased in the recent scenario, characterized by declining mortality rates, in particular at unanticipated levels. Increasing the annuity loading rewarding the accepted longevity risk is not an option for annuity providers, given that individuals already consider annuities to be expensive. An alternative solution could be represented by participating structures, providing a link to some longevity experience. In particular, the benefit amount should be allowed to decrease, possibly maintaining a guaranteed minimum amount, in case of unanticipated longevity. This should be balanced by a reduction of the annuity loading or a participation to possible longevity profit.

We introduce the Law of One Price. We compare the project system with a benchmark system, based on a replicating portfolio traded in the security market for assessing the reciprocal equilibrium or disequilibrium. The net present value (NPV) is a measure of the degree of disequilibrium and its direction (positive or negative) determines project acceptability. The NPV is based on a risk-adjusted cost of capital, acting as the minimum attractive rate of return (MARR). The latter may well be based on informed judgment as well as on a “normative” risk-adjusted rate of return drawn from some pricing models.

This research develops an approach to synergy analysis in domestic Russian mergers and acquisitions (M&As), tests potential success factors, and evaluates two types of operating and three types of financial synergies. This chapter makes two primary contributions to the literature. First, this chapter is related to the recent research that investigates M&As in emerging markets. Our chapter is unique in that we study domestic Russian M&As based on long-term firm accounting data. This approach captures private companies and small deals that make up the majority of the Russian M&A market. The second contribution is to estimate the structure of operating and financial synergies for every deal and test the significance of potential success factors. The scope is limited to domestic Russian M&As closed between January 2006 and September 2015. The sample is based on the Mergermarket database and includes 171 deals. Our analysis shows that after M&As, firms achieve −0.1% capital expenditure efficiency and −0.2% operating margin compared to the industry benchmark. Deals lead to 11.7% abnormal reduction of capital expenditures and cause 3.1% cost of debt growth. Deals create small tax benefits: the median for the whole sample is 87.5 million rubles, or 1.4% of the median deal value.

Capital is the most important production factor. In the absence of the capital, the other production factors remain unused. Capital accumulation is the key element for any business initiation and development. The limited access to finance is the common problem of any start-up or SME. However, innovative sectors (such as biotech) have more financing options in the early stages (such as venture capital, business angels, investment funds, mezzanine financings). This chapter is discussing the main challenges for initiating a business in the biotech sector from this perspective of attracting more capital that can be provided by classical 3Fs (known as “family, friends and other fools”). The chapter is presenting also the alternatives for later stages when the business became mature and is able to attract more long-term capital from capital markets (such as initial public offering—IPO, leasing, supplier credit facility, or buyer credit facility). The financing of innovative sectors is also considered as a priority for many governments of developed and emerging countries. This chapter is introducing some of the specific public financing schemes and state-aid mechanisms that are available now for innovative sectors such as the biotech sector.