18
Fundamentals of the South Sea Company
At the beginning of September 1720, the market value of South Sea shares was £164 million. The visible asset supporting this price was a flow of revenue from the company’s claim against the government of £1.9 million per year until 1727 and £1.5 million thereafter. At a 4 percent long-term discount rate, this asset had a value of about £40 million. Against this, the company had agreed to pay £7.1 million for the conversion privilege and owed £6 million in bonds and bills for a net asset value of £26.1 million. In addition, the company’s cash receivables were £11 million due on loans to stockholders and £70 million eventually due from cash subscribers. Thus, share values exceeded asset values by more than £60 million. Given the dubious value of the company’s cash claims, share values exceeded tangible net assets by five times or more. What intangible assets could have justified this value of the company? Again, the answer lies in Law’s prediction of a commercial expansion associated with the
