24. Q&A: Treasury Stock Method, Relative Value Trading, The Yield Curve & More!
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Sep 2, 2023
Listeners get a humorous glimpse into a chaotic night involving a gas smell leading to an evacuation. The discussion delves into the Treasury Stock Method, revealing its impact on equity value and earnings dilution. Relative value trading is explored through the lens of the coffee industry, emphasizing fixed income strategies. Bond risks linked to leveraged buyouts by private equity firms are highlighted. Finally, the yield curve is examined for its crucial role in economic forecasting and investment decision-making.
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The Gas Leak Scare
Jen describes a sleepless night due to a suspected gas leak, prompting a middle-of-the-night inspection.
It turned out to be a false alarm, likely caused by the dog, leading to humorous family gaslighting.
insights INSIGHT
Equity Value Calculation
Kristen explains the treasury stock method, emphasizing that a company's equity value isn't simply share price times outstanding shares.
Stock-based compensation, like options, dilutes existing shares and must be considered for accurate valuation.
insights INSIGHT
10K Diluted Shares vs. Valuation
The diluted shares reported in a 10K can't be directly used for valuation because they're calculated for diluted earnings per share and are time-weighted averages.
Valuation requires up-to-date share counts and buyback prices based on the current share price.
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Welcome back to the Wall Street Skinny with Kristen and Jen! To kick off today's episode, we answer listener questions about:
Ownership and EPS (earnings per share) dilution when analyzing companies using the Treasury Stock Method in corporate finance. We unpack the concept of a relative value trade, specifically a high yield vs. investment grade trade in the credit derivatives market of CDS and CDX. Then we switch gears to discuss a single name credit analysis in the context of a rumored leveraged buyout by a private equity firm and the potential impact on a company's existing bond holders. And finally we dive into the concept of the yield curve, explaining how the term structure of interest rates not only reflects current monetary policy, growth & inflation expectations, and risk appetites...but also impacts nearly everything financial decision you make in your daily life!
Investment Banking & Private Equity Fundamentals HERE Fixed Income Sales & Trading HERE
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