Method and system for analyzing a capital structure for a company

• US 20040177016A1
• Filed: 09/30/2003
• Published: 09/09/2004
• Est. Priority Date: 09/30/2002
• Status: Abandoned Application

• Current Assignee: Goldman Sachs & Co. LLC (Goldman Sachs Group Incorporated)
• Original Assignee: Goldman Sachs & Co. LLC (Goldman Sachs Group Incorporated)
• Inventors: Jones, Emerson P., Hakanoglu, Erol
• Application Number:
  US10/676,297
• Publication Number:
  US 20040177016A1
• Time in Patent Office: Days
• US Class Current: 705/35
• CPC Class Codes: G06Q 40/00 Finance; Insurance; Tax strategies; Processing of corporate or income taxes
• CPC Class Codes: G06Q 40/02 Banking, e.g. interest calculation or account maintenance credit or loans G06Q40/03
• CPC Class Codes: G06Q 40/04 Trading; Exchange, e.g. stocks, commodities, derivatives or currency exchange
• CPC Class Codes: G06Q 40/06 Asset management; Financial planning or analysis
• CPC Class Codes: G06Q 40/10 Tax strategies
• CPC Class Codes: G06Q 40/12 Accounting

Abstract

Various embodiments of the present invention relate to methods and systems for analyzing a capital structure for a company (e.g., a public corporation). More particularly, one embodiment of the present invention relates to a decision making tool for analyzing a company'"'"'s capital structure, which decision making tool may include: (1) Economic EPS, wherein Economic EPS and its volatility may capture the cost/risk trade-off of all fixed income and equity-related alternative capital structures; and (2) Capital Structure Efficient Frontier, wherein a company should strive to bring its capital structure to the efficient frontier of strategies with the highest EPS for given levels of EPS risk. Of note, the Economic EPS and the Capital Structure Efficient Frontier methodologies of the present invention provide a unifying framework in which to analyze a company'"'"'s capital structure (e.g., for identifying and implementing the economically optimal solutions to a company'"'"'s capital structure challenges). Apart from the global view of the company'"'"'s capital structure, this framework can be used as a decision-making tool for analyzing and comparing specific restructuring transactions (including, but not limited to): new financing, share repurchase, liability management, bank capital optimization, and/or tax-driven hybrid equity issuance.

Claims

1. A method implemented by a programmed computer system for characterizing a capital structure of an entity in connection with a cost of a selected debt/equity ratio relative to a risk associated with the selected debt/equity ratio, which method comprises the steps of:

iteratively changing a value of a debt/equity ratio associated with the entity;

calculating values of earnings per share associated with the entity based at least in part upon the iteratively changed values of the debt/equity ratio associated with the entity;

calculating values of earnings per share risk associated with the entity based at least in part upon the iteratively changed values of the debt/equity ratio associated with the entity; and

recording the calculated earnings per share values associated with the entity and the calculated earnings per share risk values associated with the entity.

2. The method of claim 1, wherein the entity is a public corporation.

3. The method of claim 2, wherein at least one of the calculated earnings per share values and the calculated earnings per share risk values is applied to a financial presentation relating to at least one of a balance sheet and an earnings per share metric.

4. The method of claim 1, wherein the iterations and calculations are carried out at least in part using a Monte Carlo simulation.

5. The method of claim 1, wherein the outputted calculated earnings per share values and the outputted calculated earnings per share risk values are plotted against one another.

6. The method of claim 5, wherein the plot of calculated earnings per share values versus calculated earnings per share risk values is credit adjusted.

7. The method of claim 1, further comprising:

inputting data associated with the entity including a number of common shares outstanding, a value of earnings, a value of dividends per share, a change in the effective number of common shares outstanding, which change in the effective number of common shares outstanding reflects the possibility, based upon an economically reasonable analysis in light of market conditions, of conversion of a convertible security; and

a value of coupon payments;

wherein each value of earnings per share is calculated at least in part using the formula

$\mathrm{EPS}={\mathrm{DPS}}_0+\frac{{\mathrm{Earnings}}_0-N_o\times <br><br>{\mathrm{DPS}}_0-\mathrm{Coupon}}{N_o+\mathrm{\Delta <br><br>}<br><br>\text{\hspace{1em}<br><br>}<br><br>N_{\mathrm{eff}}},$

wherein Earnings₀ equals the input value of earnings, N_o equals the input number of common shares outstanding, DPS₀ equals the input value of dividends per share, Coupon equals the input value of coupon payments, and Δ

N_eff equals the input change in the effective number of common shares outstanding.

8. The method of claim 7, wherein the economically reasonable analysis in light of market conditions takes into account a conversion premium associated with the convertible security.

9. The method of claim 1, further comprising:

inputting data associated with the entity including a number of existing shares, a value of earnings, a value of an equity dividend, a value of an attributed after-tax interest expense from a convertible security, and a number of attributed shares from the convertible security, which number of attributed shares reflects the possibility, based upon an economically reasonable analysis in light of market conditions, of conversion of the convertible security;

wherein each value of earnings per share is calculated at least in part using the formula

EPS=dividend per share+retained EPS;

wherein dividend per share=the value of the equity dividend/the number of existing shares; and

wherein retained EPS=(earnings without taking effect of any interest expense from the convertible security minus attributed after-tax interest expense from the convertible security)/(the number of existing shares plus the number of attributed shares from the convertible security).

10. The method of claim 9, wherein the economically reasonable analysis in light of market conditions takes into account a conversion premium associated with the convertible security.