Books and Articles by Michael Taillard

Everything that makes up a corporation and everything a corporation owns, including the building, equipment, office supplies, brand value, research, land, trademarks, and everything else, are considered assets. Believe it or not, when you start a corporation, that company’s assets aren’t just included in a Welcome Letter; you have to go out and acquire them.

Corporate finance is the study of how groups of people work together as a single organization to provide something of value to society. It’s the job of those in corporate finance to manage the organization so that resources are efficiently utilized, the most valuable projects are pursued, the corporation can remain competitive, and everyone gets to keep their job.

The strictest test of a company’s liquidity is the cash ratio. This metric utilizes only the most liquid of assets — cash equivalents and marketable securities — to determine how many times a company could pay off its liabilities over the next 12 months. For companies that have very high accounts receivables, either because they sell expensive items that customers make long-term payments on or because they issue a lot of bad debt, this is often the best ratio to use.

Portfolio engineering and investing strategy go hand-in-hand and are easily the most mathematically complicated subject in all of financial engineering. As Isaac Newton pointed out, modeling the madness of men is more difficult than modeling the movement of the planets. He was entirely correct, and portfolio engineering is an extreme example of how this is true.

You need to know how to read bonds in the language of corporate finance to understand their potential impact on your corporation. Look in the finance portion of any newspaper (for example, The Wall Street Journal) and you’ll see information about the bond market. This data about specific bonds is meant to help buyers and sellers make effective decisions regarding the potential to invest in bonds or issue their own.

There are certain risks that no amount of diversification can eliminate. Specific risk is any risk associated with an individual investment and holds the possibility of being eliminated or greatly minimized through diversification. Default risk on a bond, liquidity risk on the corporation underlying a stock, and the risk of a building losing value in the real estate market are all specific risks.

Calculating the cost of debt is pretty simple. Debt includes any long- or short-term debt that is used to finance the operations of a business. The biggest influence on the cost of debt is simply the interest rate on debt incurred, measured by using the current value of future cash flows to repay the loans. Well, you’re looking at the same thing from the perspective of corporate costs of debt rather than investor potential for debt.