October 2021
Intermediate to advanced
528 pages
10h 11m
English
book
Capital Allocation: Principles, Strategies, and Processes for Creating Long-Term Shareholder Value
by David R. Giroux
Content preview from Capital Allocation: Principles, Strategies, and Processes for Creating Long-Term Shareholder Value
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CHAPTER 4
Five Stress Test Rules for Downturns
To protect the firm and its long-term shareholders during periods of weakness, there are five stress test rules every management team and board should follow. Breaking any of these rules in a downturn is a surefire way to destroy shareholder value.
These are, in order of importance:
1. Don’t go bankrupt.
2. Don’t issue equity from a point of weakness.
3. Don’t cut the dividend.
4. If you are an investment-grade firm, remain investment grade throughout the downturn.
5. Don’t lose financial flexibility (i.e., maintain the ability to deploy capital opportunistically).
Taking into account the unique characteristics of each firm, a management team and board should employ as much leverage as possible ...
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