Showing papers on "Cash flow forecasting published in 1995"

Evidence on the Role of Cash Flow for Investment

Abstract: Recent work in macroeconomics argues that imperfection in captial markets may lead to business cycle fluctuations by propogating relatively modest shoks. Evidence for such a mechanism (also known as the "financial accelerator") consists largely of firm-level studies showing that cash flow is an important predictor of investment. But this evidence is often viewed with skepticism because cash flow is also a good indicator of investment opportunities. In this paper, we develop a framework for estimating the extent to which the predictive power of cash flow can be attributed to its role as a "fundamental" versus its role in alleviating credit frictions. For firms with access to commercial paper and bond markets, we find that the perfect capital markets model of investment can fully account for the role of cash flow. For firms with only limited access to capital markets (as indicated by lack of participation in public debt markets) however, investment appears to be ! "excessively" sensitive to fluctuations in cash flow. These results thus clarify the role of cash flow in investment equations and provide support for the existence of a financial accelerator.

Do Financing Constraints Explain Why Investment is Correlated with Cash Flow

Abstract: This paper investigates the sources of the correlation between corporate cash flow and investment by undertaking an in-depth analysis of the 49 low-dividend firms identified by Fazzari, Hubbard, and Petersen (1988) as having an unusually high investment-cash flow sensitivity. We find that in only 15% of firm-years is there some question as to a firm's ability to access internal or external funds to increase investment. Strikingly, those firms that appear less financially constrained exhibit a significantly greater investment- cash flow sensitivity than firms that appear more financially constrained. We find this pattern for the entire sample period, for sub-periods, and for individual years. The results indicate that a higher sensitivity cannot be interpreted as evidence that a firm is more financially constrained. We discuss reasons and provide evidence why the opposite may be true. These findings challenge much of the existing evidence on the effects of financial constraints.

Corporate Finance over the Past 25 Years

Abstract: This paper traces developments in the theory of corporate finance over the past 25 years. These include a shift from consideration of how the value of a given cash flow stream is affected by its division among different classes of security holders to a consideration of how structure of claims affects the cash flow stream itself. A major reason for this shift of emphasis is the attention now paid to the role of individually motivated agents in the corporation. Other important developments include recognition of information asymmetries, the role of private benefits of control, and the application of the option pricing paradigm to the evaluation of real investments.

Cash Management for Index Tracking

Abstract: Although all standard equity indexes have a zero weight in cash, managers running index-tracking portfolios often find that maintaining a positive cash holding is cost-efficient. This practice saves significantly on transaction costs because temporary cash inflows and outflows can be absorbed into the cash inventory. In this paper, a mean–variance framework is used to analyze the cash management problem for an index-tracking portfolio. The theoretical model is based on passive index tracking, but it has implications for any portfolio manager with an equity benchmark and random cash inflows and outflows.

An Evaluation of the Decision Usefulness of Cash Flow Statements by Australian Reporting Entities

Abstract: In June 1991, the Australian Accounting Standards Board issued AASB 1026, Statement of Cash Flows. Since replacing the funds flow statement, the new accounting standard has become a compulsory part of Australian corporate financial reporting. In contrast to cash flow developments in the US and UK. the emergence of AASB 1026 has been preceded by almost no significant research attention by Australian academics. This study surveyed the attitudes to cash flow statements of 210 public companies listed on the Australian stock exchange. Findings revealed that there was particularly strong support for the essential provisions of AASB 1026 and the underlying principles of cash flow reporting. The results indicated that the cash flow statement is important for a wide variety of internal and external decision contexts, and appealed to a wide range of users. Furthermore, compared with previous research (e.g. McEnroe, 1989), the present survey demonstrated that operating profit was not considered by a large n...

Free Cash Flow in the Life Insurance Industry

Abstract: Introduction Jensen (1986) defines free cash flow as cash in excess of that required to fund all positive net present value projects. Free cash flow tempts managers to expand the scope of operations and the size of the firm, thus increasing managers' control and personal remuneration, by investing free resources in projects that have zero or negative net present values. These unprofitable investments are an aspect of the basic conflict of interest between owners and managers. Jensen argues that some industries are particularly susceptible to the generation of free cash flow, and we posit that life insurers constitute a low-growth industry that is likely to generate such excessive cash flow. We argue that, in the life insurance industry, wasteful uses of free cash flow occur to the detriment of the firm's owners and policyholders. Managerial abuses of free cash flow are inconsistent with the goal of owner wealth maximization. Expenditures wasted by management instead could have been distributed to the owners of stock insurers as cash dividends or to the policyholders of mutual or stock firms in the form of lower premiums, higher policy dividends, or higher investment returns.(1) While regulators primarily focus on insurer solvency, they also are concerned with maintaining premium rates that are not excessive. To the extent that regulators monitor life and health insurance rates, dividends, and surrender values, free cash flow should be of concern to them. Mayers and Smith (1981) predict more severe owner-manager conflicts in mutual insurers than in stock insurers, and we test their prediction using data from the life insurance industry. Specifically, we test for differences in free cash flow between stock and mutual insurers in the U.S. life insurance industry.(2) Focusing on the life insurance industry allows us to isolate firms having similar investment opportunity sets and differing organizational forms, reduce measurement error in our proxy for free cash flow because of the limited variation in accounting techniques used across the industry, and control for the confounding effects between the investment opportunity set and free cash flow that arise in cross-industry studies. The majority of existing evidence on the free cash flow hypothesis focuses on intertemporal changes in financial structure. Jensen posits that leveraged buyout activities are one way of controlling free cash flow because the debt incurred in such transactions forces managers to disgorge excess cash. Evidence supporting the free cash flow motivation for financial restructuring has been provided by many authors, including Loh (1992), Gupta and Rosenthal (1991), Lehn and Poulsen (1989), Gibbs (1993), Griffin (1988), and Moore, Christensen, and Roenfeldt (1989). Byrd (1988) examines the cross-sectional relation between free cash flow and ownership structure and finds some evidence that organizational forms specific to the oil industry (corporations, master limited partnerships, and royalty trusts) have different agency costs of free cash flow. Specifically, the agency costs of free cash flow are lower in royalty trusts and master limited partnerships than in corporations. Although previous empirical work is generally consistent with the free cash flow hypothesis, the financial industry has been ignored in most studies beo cause of its unique regulatory environment. The insurance industry, in particular, has distinctly different organizational forms not found in other industries, thus providing a natural laboratory for examining cross-sectional differences in organizational form (Mayers and Smith, 1990).(3) In this study, we test for differences in free cash flow between stock and mutual insurers in the U.S. life insurance industry. Our purpose is to examine whether organizational form affects managerial behavior with respect to the holding of free cash flow. Our results also offer insight into whether contractual limitations of managerial discretion fully compensate for the losses of debt market bonding and the market for corporate control. …

Investment, cash flow, and sunk costs

Abstract: This paper's analysis of U.S. manufacturing industries confirms previous research showing that cash flow and investment spending are positively correlated, even after controlling for investment demand, and it makes two new points as well: firstly, that the effect of cash flow on investment is greater for durable goods industries than for nondurable goods industries and, secondly, that cash flow's effect is significantly larger in industries with high sunk costs than in those with low sunk costs. The latter finding suggests that external financing of capital investment is more difficult when the assets being financed are highly specific or are sunk. Copyright 1995 by Blackwell Publishing Ltd.

Resource-based model for automatic cash-flow forecasting

Abstract: The paper discusses different approaches to, and models for, project level cash flow forecasting. The importance of cash flow management, both at the project and at the company level is also discussed. The paper presents a resource-based computerized cash-flow forecasting model. The main issue addressed by that model is the solution of the compatibility problem caused by the different data structures of the cost and the schedule items. The cost items are normally specified in terms of the project's physical elements (e.g. slab, beam, column, etc.), while the schedule is expressed in terms of activities (e.g. formwork erection, rebar erection, rebar placement, concrete pouring, etc.). The proposition is the automatic integration of the bill of quantities, the estimate and the schedule databases, using a non-project-specific database, which is a dynamic component of the model. The integration algorithms are presented. Additional issues addressed by the model are time lag and billing period adjustments, mate...

Using Cash Flow Ratios to Predict Business Failures

Abstract: Cash flow may be viewed as the lifeblood of a corporation and the essence of its very existence. Numerous empirical studies that use financial and accounting measures to predict business performance (i.e., success or failure) emphasize the importance of cash flow information in predicting bankrupt and nonbankrupt firms (Bernard and Stober, 1989; Gentry, 1984 and 1985; BarNiv, 1990, Carslaw and Mills, 1991). Most of those studies conclude that the level of cash inflows and outflows from various activities are highly interrelated. A failure of any part of the system to operate may endanger or cause the entire firm to fail (Largay and Stickney, 1980). The primary objective of this study is to assess the usefulness of cash flow disclosures as required by Statement of Financial Accounting Standards No. 95 (SFAS 95) in the prediction of bankruptcy, and whether cash flow data provide a superior prediction of business failure over the models employing conventional accrual accounting data. The business failure prediction criterion was used for two reasons: (1) Business success or failure has been causally linked to the volume of net cash inflow and outflow components from various activities (Gentry, 1985). For example, the inability of a firm to generate enough cash from its operations may force the firm to borrow more money or to dispose of its capital investments to meet its obligations. If this situation persists over an extended period of time, it may lead to an involuntary bankruptcy. (2) This criterion, which is empirically testable, has been successfully used for investigating the usefulness of accounting information in other studies (Altman and Spivack, 1983). A second objective of this study is to present some new financial ratios derived from cash flow data and to highlight their potential use in financial analysis and prediction of business performance. Some of these are new ratios which have not been used in other studies. MOTIVATION The motivation for this study came from two important developments in the business world: (1) the multitude of business failures across all types of business, and (2) the emphasis placed on cash flow information by the Financial Accounting Standards Board in SFAS 95. Could the use of cash flow data help predict business failure and thus help prevent business failure? The link between cash flow data and corporation net worth has been established in earlier research (Rayburn, 1986). However, these studies were done before the issuance of SFAS 95 and used different measures of cash flow from operations. Numerous studies show that financial ratios based on accrual accounting data possess significant ability to predict bankruptcy (Altman and Spivack, 1983; Beaver, 1966, 1968; Libby, 1975; Ohlson, 1980). Most of these studies concluded that companies with weak and unstable financial indicators (ratios) are more likely to fail than those companies with stronger and more stable financial indicators (ratios). However, these models did not emphasize cash flow data. An ideal approach is probably an integrated one, such as the approach suggested in this study. This paper provides evidence on the usefulness of cash flow data in the prediction of business failure and whether the integration of cash flow data with accrual accounting data can provide a superior measure over accrual accounting data alone for predicting bankruptcy. It should be noted that this study does not suggest overlooking these earlier predictive methods, but rather it addresses whether cash flow information can complement the information already provided by accrual accounting data. There are at least four key differences between the prior studies and this study. First, financial ratios based on conventional accrual accounting are modified to include cash flow information. Second, while prior studies use different approaches to measure cash flow from operations, this study bases its measures of cash from operations on those criteria required by SFAS 95. …

Finance constraints or free cash flow

Abstract: It has long been argued that firms prefer internal to external finance for funding investment. Modern literatures in industrial organization, macroeconomics, and finance argue this preference is caused by information asymmetries. There are, however, important disagreements about the effect of the asymmetries. Asymmetries may lead to binding financing constraints, or they may allow managers to use free cash flow for unprofitable projects. Each model predicts a different relationship between investment and changes in debt finance and this paper estimates this relationship using firm-level data. The principal findings are that both financing constraints and the agency costs of free cash flow affect investment in a manner consistent with a life cycle model of the firm.

The Influence of Financial Factors on Corporate Investment

Abstract: Recent theoretical developments have shown that cash flows and the structure of a firm's balance sheet may have an important influence on investment. Establishing a link between cash flows, leverage and investment provides insights into the way that monetary policy and cyclical factors more generally influence the corporate sector. If cash flows are an important determinant of investment then changes in monetary policy (by changing interest rates) will influence investment through a cash flow effect as well as through altering the rate at which the returns to investment are discounted. If this is the case, the higher leverage of the corporate sector implies, other things being equal, that monetary policy may have a larger impact on investment than in the past. In this article we use panel-data analysis to examine the impact of financial factors on investment decisions of firms in the Australian corporate sector. We find strong support for the influence of financial factors on investment decisions. Leverage, internally generated cash flows, and the stock of cash and liquid financial assets are all important influences on investment behaviour, particularly for smaller firms, highly leveraged firms, and firms with high retention ratios.

Introduction to Accounting

Abstract: The Framework of Accounting The Accounting Process Suppliers of Accounting Information Financial Accounting and Management Accounting Compared External Users of Accounting Information Principal Accounting Statements The Balance Sheet The Entity Concept Reporting Capital in the Balance Sheet Raising Further Finance The Investment Decision Business Development The Trading Cycle Reporting Changes in Owner's Capital Assets = Capital + Liabilities A Further Illustration Classification of Assets and Sources of Finance Valuation of Assets Questions Profit Calculated as the Increase in Capital Profitable Activity Profit and Changes in Gross Assets Balance Sheet Presentation Vertical Format Profits, Losses and Changes in Net Assets Profit Measured by Capital Changes Capital Injections and Withdrawals Questions The Preparation of Accounts from Cash Records Accounting Systems and Information Requirements The Matching Concept Profit = Revenue - Expenditure Gross Profit and Net Profit The Problem of Periodic Profit Calculation The Identification of Revenue The Realization Concept Matching Expenditure with Revenue The Benefit Principle The Preparation of Accounts from Cash Records A Worked Example Clubs and Societies Questions The Double Entry System I: The Initial Record of Transactions Introduction Cash Flows Flows of Goods and Services Questions The Double Entry System II: Ledger Accounts and the Trial Balance introduction The Interlocking Effect of Transactions Ledger Accounts Books of Prime Entry Control Accounts for Debtors and Creditors The Trial Balance Computerized Accounting Systems Advantages of Double Entry Questions The Double Entry System III: Periodic Accounting Reports Periodic Accounts Adjustments to the Trial Balance Stocks (Inventories) Depreciation Disposal of Fixed Assets Prepayments and Accruals Bad Debts The Adjusted Trial Balance Questions Asset Valuation, Profit Measurement and the Underlying Accounting Concepts Asset Valuation and Profit Measurement Tangible Fixed Assets Intangible Fixed Assets Stock Valuation Methods Accounting Concepts Questions Partnerships Introduction The Partnership of Agreement The Creation of a Partnership The Division of Profit Capital and Current Accounts Changes in Membership Change in Profit-Sharing Ratio Dissolution of Partnerships Questions Company Accounts Formation of Registered Companies The Annual Report Other Sources of Information Share Capital Share Premium Account Share Forfeiture The Rights Issue Loan Capital and Debentures The Appropriation Account Revaluation Reserve Redemption of Debentures Bonus (Capitalization, scrip) issue of shares Groups of Companies Limitations of company Accounts Questions Some Specialized Accounting Techniques Introduction The Manufacturing Account Departmental Accounts Branch Accounts Instalment Credit Transfer of business Value Added Tax (VAT) Losses of Stock and Cash Questions Interpretation of Accounts: The Cash Flow Statement Introduction Format Statement Construction Some Complexities of the Cash Flow Statement Interpretation Using the Cash Flow Statement Questions Interpretation of Accounts:Ratio Analysis The Need for Profit and Cash Principles of Ratio Analysis Classification of Accounting Ratios Return on Capital Employed (ROCE) Profit Ratios Solvency Ratios Asset Turnover Ratios Relationship between Accounting Ratios Gearing (or Leverage) Cash Flow Statement Ratios Limitations of Accounting Ratios Linking together Cash Flow Analysis and Ratio Analysis Questions Decision-Making Introduction Cost Behaviour Total Costing and Overhead Recovery Rates Investment Appraisal Forecast Results Questions Standard Costing and Budgetary Control Introduction Budgetary Control Preparation of the Budgets Standard Costing Calculation of Variances Questions

Case-Based Reasoning for Cash-Flow Forecasting using Fuzzy Retrieval

Abstract: Case-Based Reasoning (CBR) simulates the human way of solving problems as it solves a new problem using a successful past experience applied to a similar problem. In this paper we describe a CBR system that develops forecasts for cash flow accounts. Forecasting cash flows to a certain degree of accuracy is an important aspect of a Working Capital Decision Support System. Working Capital (WC) management decisions reflect a choice among different options on how to arrange the cash flow. The decision establishes an actual event in the cash flow which means that one needs to envision the consequences of such a decision. Hence, forecasting cash flows accurately can minimize losses caused by usually unpredictable events. Cash flows are usually forecasted by a combination of different techniques enhanced by human experts' feelings about the future, which are grounded in past experience. This makes the use of the CBR paradigm the proper choice. Advantages of a CBR system over other Artificial Intelligence techniques are associated to knowledge acquisition, knowledge representation, reuse, updating, and justification. An important step in developing a CBR system is the retrieval of similar cases. The proposed system makes use of fuzzy integrals to calculate the synthetic evaluations of similarities between cases instead of the usual weighted mean.

Key Management Ratios: How to Analyse, Compare and Control the Figures That Drive Company Value

Abstract: PART I: FOUNDATIONS 1. Background 2. Financial statements 3. Balance sheet terms 4. Profit and loss account PART II: OPERATING PERFORMANCE 5. Measures of performance 6. Operating performance 7. Performance drivers PART III: CORPORATE LIQUIDITY 8. Cash flow cycle 9. Liquidity 10. Financial strength 11. Cash flow PART IV: DETERMINANTS OF CORPORATE VALUE 12. Corporate valuation 13. Financial leverage and corporate valuation 14. Growth PART V: MANAGEMENT DECISION MAKING 15. Cost, volume and price relationships 16. Investment ratios 17. Shareholder value added (SVA) Appendices

Streetsmart Financial Basics for Nonprofit Managers

Abstract: Acknowledgments Note to Reader PART ONE ANALYSIS CHAPTER 1 Organizational Structure: Programs and Corporations Types of Nonprofit Organizations Structure of Nonprofit Organizations Loss of Tax-Exempt Status-The Monster Within CHAPTER 2 Mission: Managing Your Two Bottom Lines The Role of a Value System The Nonprofit's Dilemma and How to Solve It CHAPTER 3 Accounting as a Second Language-A Nine-Point Program The Entity Principle Money Measurement Conservatism Principle The Cost Concept The Materiality Principle Going Concern Dual Aspect Realization Principle Matching Principle CHAPTER 4 Assets Are for Boards, Activities Are for Managers Concepts versus Details Boards Invest, Managers Spend If It Has to Be Decided Today, It's Probably the Wrong Question Boards Own the Controls, Managers Implement Them CHAPTER 5 Balance Sheets: How They Get That Way Current Assets Noncurrent Assets Current Liabilities Noncurrent Liabilities Making the Balance Sheet Dance Transparency, Thy Name Is IRS Form 990 Sweeping Change What to Do CHAPTER 6 Financial Analysis: A Few Diagnostic Tools Financial Statement Analysis for Math Phobics Current Ratio Days' Cash Days' Receivables Cash Flow to Total Debt Debt to Net Assets Total Margin Operating Margin Accounting Age of Plant/Equipment (or Land, Buildings, and Equipment) A Footnote PART TWO ACCOUNTING CHAPTER 7 Nonprofit Accounting: Acknowledging the Strings Attached Net Asset Categories Other Provisions What It All Means CHAPTER 8 Cost Accounting: How Much Does It Cost? A Form of Management Accounting Indirect Costs Certain Support Costs Get Assigned to Other Support Costs Breakeven Analysis-Another Use for Cost Data Cost Accounting versus Cost Reporting CHAPTER 9 Auditing: Choosing and Using an Auditor Audit, Review, and Compilation The Auditor Market Getting Value from the Audit Conclusion PART THREE OPERATIONS CHAPTER 10 Cash Flow Management: Why Cash Is King Up the Balance Sheet How Much Cash Is Enough? Conclusion CHAPTER 11 Capital: Why Capital Is Not a Four-Letter Word The Mechanics of Capital Financing The Present Value of Money Sources of Capital The Great Divide among Nonprofits Future Access to Capital Markets The Role of Net Assets Strategic Capital Management CHAPTER 12 Budgeting: Taming the Budget Beast Playing Revenues Like a Symphony Expenses Indirect (General and Administrative) Costs Conclusion CHAPTER 13 Indirect Costs and Other Despised Items Still, It's Low That Counts Secret of the Indirect Cost Game CHAPTER 14 Pricing: How Much Should It Cost? Pricing Methodologies Going the Other Way-Contractual Adjustments and Subsidies Pricing Strategies How to Price CHAPTER 15 Profit: Why and How Much? Profit Defined Uses of Profit Profit-How to Get It What Can Be Done CHAPTER 16 To Raise More Money, Think Cows Donations Bequests-Cow to Charity Charitable Remainder Trusts-Milk to Beneficiaries, Cow to Charity Pooled Income Funds-Donors Put Their Cows in a Herd, Keep Rights to Milk CHAPTER 17 Insurance: The Maddeningly Complicated Art of Covering Your Assets To Insure or Self-Insure? Risk Management CHAPTER 18 Internal Controls for External Goals The Elements of Internal Control How to Monitor the System Maintaining the System Conclusion CHAPTER 19 Enron Spawn Some Predictions The New Industry of Charity Watching CHAPTER 20 Management Controls: Toward Accountability for Performance Management Controls Circa 1980 Beyond Management Controls in the Twenty-First Century: How to Do It Messages How to Prepare-The CFO of the Future Appendix A A Financial Management Cultural Primer Appendix B Budget Bloopers Appendix C Using the Web Site Index

Corporate finance : concepts and policies

Abstract: 1. Financial Management: Objectives and Decisions. 2. Organizational forms of business and taxes. 3. Net present value and the time value of money. 4. Financial securities and corporate governance. 5. Financial markets, interest rates and exchange rates. 6. The basic valuation model. 7. Risk and required rates of return. 8. Capital investment decisions. 9. Investment analysis. 10. Investment decisions. 11. The cost of capital and financial leverage. 12. Financial leverage. 13. Financial structure. 14. Dividends and free cash flow. 15. Designing and selling securities. 16. Leasing. 17. Financial ratios and financial statement analysis. 18. Financial forecasting and cash budgeting. 19. Working capital management. 20. Current liability management. 21. Cash and marketable security management. 22. Accounts receivable and inventory management. 23. Mergers, acquisitions and corporate control. 24. International financial management. 25. Options, futures and financial management.

Understanding Cash Flow

Abstract: Partial table of contents: Introduction to Cash Management: Fundamentals of Cash Flow. Liquidity, Solvency, and Cash Flow. The Impact of Budgeting on Cash Flows: Effects of Budgeting on Cash Flow. Budgeting Cash Receipts and Disbursements. Using Probabilities to Budge Cash Receipts and Disbursements. Avoiding Pitfalls in Granting Credit: Cash Flow Management. Cash Collection and Delayed Payment Techniques. An Effectiveness Measure for Managmeent's Investment of Idle Cash. Internal Controls to Prevent Losses and Errors. Maintaining Control Over Cash. Index.

The usefulness of cash flow statements

Abstract: Use of cash flow reporting has been in the rise for the past few years to ensure that cash flows are reported in a form that highlights the significant components of cash flow and facilitates comparison of the cash flow performance of different business. Because there are direct and indirect methods of preparing such statements, this paper is to examine the usefulness of the cash flow statements in Hong Kong context using empirical study. It was suggested from the findings that cash flow statements are preferred by a lot of users.

A note on the relationship between reported cash flow measures, ratios and their accrual counterparts

Abstract: This note focuses on information redundancy of cash flow measures reported in and financial ratios derived directly from Cash Flow Statements. Previous research utilised recomputed, “traditional” and “refined”, measures to proxy for cash flow. Comovements are derived amongst various earnings and cash flow key variable measures, select financial ratios and changes in financial ratios. Key variables' results support the notion that reported cash flows are correlated with funds flow and earnings. However, reported cash flows relative to funds flow are less correlated with most of their accrual based counterparts. Cash flows thus have potential to provide new and non-redundant information relative to funds and accruals. Also, the incremental benefit of reported, relative to reconstructed cash flow measures is apparent. In light of the above, the merit of cash flow for the specific decision context of identifying suspended firms is investigated. Cash flow data in this context is found to be as useful as, but not superior to, comparable accruals data.

Properties of Economic Income in a Private Information Setting

Abstract: This paper adopts a valuation perspective within an asymmetric information setting and explores properties of economic income. The optimal intertemporal contract induces an accrual component of income which would not exist absent the information problem. The contracting solution introduces a dampening effect -- if cash flow increases by one dollar, income increases by less than one dollar. Thus, the accrual is inversely related to cash flows. Further, this dampening is greater for more favorable cash outcomes.

The transit capital cost index study

Abstract: This report is intended for use by local, state, and federal officials responsible for the development and/or review of capital budgeting plans for the development and modernization of light and heavy rail transit systems. This report documents the research aimed at improving the estimation of future capital costs for light and heavy rail fixed guideway projects. It addresses the problem of devising a set of transit element cost indices designed to account for inflation in capital cost projections for fixed guideway projects. Specifically, the research produced a set of cost indices for over 60 different guideway project components/elements, for 8 groupings of related elements, and for the overall cost of developing fixed light and heavy rail systems. The research compares the properties of these transit specific cost indices with broader measures of inflation, suggests how they should be incorporated in cash flow projections for proposed fixed guideway projects, and suggests directions for future research.

Monitoring Projects Using Cash Flow Control Charts

Abstract: Post Completion Audits (PCA). an important area in capital budgeting have not received much attention in the past. In a competitive environment, however, PCA plays an important role. Uncertain initial forecasts and current estimates can be revised using post audit information under a Bayesian approach at virtually no additional cost, thus enhancing future decisions. Prueitt and Park [2]. developed the Cash Flow Control Chart (CFCC) model for a special class of investment problems with multiple identical units with uncertain cash flows, typically found in Advanced Manufacturing Systems (AMS) and fleet replacement. This paper provides meaningful interpretations to modified Cash Row Control Chart (M-CFCC) patterns.

Optimal Cash Management for Investment Funds

Abstract: We consider the question of how much cash should be held by an investment fund for transactions purposes. Cash is needed to meet redemptions and rights offerings; it is generated by dividends and contributions. It is assumed the cumulative cash flow follows a random walk, perhaps with a drift. If transactions costs were zero, it would be optimal to keep zero cash balances, since cash reduces expected return and adds to tracking error. But keeping cash balances at zero would be very expensive in the presence of transactions costs, since random walks have infinite variation. The optimal cash policy requires a no trade interval [*]. If cash balances are within this interval, no transfers between cash and portfolio securities takes place. If cash falls beneath zero, securities should be sold to return the cash balance to zero. If cash exceeds L*, cash should be invested in the portfolio to reduce the cash balance to L*. We derive closed form solutions for L*, and show how this responds to changes in transactions costs and other parameters of cash flows and portfolio returns. Finally, a closed form estimate of expected turnover associated with optimal strategies is derived.

Free Cash Flow and R&D

Abstract: This study analyzes the free cash flow problem (Jensen 1986) for internal investments specifically research and development. Hypothetically accounting data will provide monitoring information about the free cash flow agency problem and the extent of the alignment of investor and management interests. In order to do the analysis this study develops a research framework based on work of Modigliani and Miller (1955) and Lang and Litzenberger (1989). In this model market value is derived from cash flows which originate from assets-in-place (earnings information) and growth options (R&D information). Empirical evidence supports this model of firm value. To analyze the management-investor agency issue a research design defines an interaction of a firm's free cash flow with R&D expense in the context of the firm valuation model and examines the interaction effect on stock market returns. There is a significant (.05 level) negative investor reaction to the interaction of R&D expenditure and free cash flow.

On the Efficiency of Cash Settlement

Abstract: This paper investigates the question of why banks almost always settle payments in cash as opposed to debt. Our model suggests that adverse selection with respect to the quality of bank assets may be the primary motivation underlying this practice. Banks with higher-quality assets prefer not to exchange debt with other banks if their debt is indistinguishable from that of banks with lower-quality assets. Banks with higher-quality assets prefer to sell off assets to informed outside agents in return for cash, which can then be used in settlement. Willingness to settle in cash serves as a signal of the quality of a bank's assets; hence, in equilibrium all banks settle in cash. If information flows are disrupted so that no outsiders are informed, then the signaling value of cash settlement is lost. The last result is consistent with the use of debt-based settlement schemes during the National Banking Era (1864-1914).

Cash & Foreign Exchange Management Practices Chinese State Enterprises

Abstract: INTRODUCTION Little information is available on the current financial management practices by firms outside the free world. The People's Republic of China is a case of special interest because of the lack of survey data A working relationship with the Changsha Communications University (Hunan Province) reduced the difficulties associated with gathering data on Chinese state enterprises. The University is one of twenty-four campuses in P.R. China which are supervised by the Ministry of Transportation. An annual seminar on Management Accounting for transportation companies is held at Changsha Communications University. A Chinese language questionnaire dealing with different aspects of cash and foreign exchange management was distributed to all participants of the 1991 seminar. Notwithstanding the small size of this data base compared to the population of Chinese state enterprises, we believe that inferences derived from the available data base are very useful. Although few of the companies surveyed are directly exposed to foreign exchange risk, it is useful to briefly discuss the Chinese government policies on managing its exchange rate. P.R. China has an adjustable peg system in which the Renminbi (RMB) is linked to the U.S. dollar. China's official reserves are mostly held in U.S. dollars while the U.S. dollar is the main currency of denomination for international trade transactions. The RMB has been depreciated against the U.S. dollar at infrequent time intervals making the currency temporarily overvalued. An overvalued RMB reduces the costs of the much needed imports while it has no detrimental competitive impact on exports considering the low (labor) costs of products manufactured in mainland China. Under international pressure, particularly from the GATT and the U.S. government, the Chinese government has gradually reduced its foreign exchange controls and import restrictions and is determined to make the RMB freely convertible in the near future. ISSUES RESEARCHED The purpose of the survey was to investigate responsibilities and practices for short term financial management. A study of cash management must inevitably be linked to the study of banking relations and the management of foreign exchange. In recognition of these interrelationships, this study addresses the following specific issues. Responsibility for cash management. It is hypothesized that cash management constitutes a major financial function in the firm and consequently, the responsibility for it within the firm should reside with senior management. Cash flow planning. The preparation of formal cash budgets is a fundamental cash management activity. We investigate whether or not these Chinese state enterprises use some systematic procedure to project cash flows, as well as the extent to which formal quantitative models are used for cash management. Banking relationships and the use of cash management services. We investigate the number of banking relationships these Chinese state enterprises have, the use of cash management services provided by banks and the degree of customer satisfaction relative to the services received. Computerization of cash management. Balance reporting, electronic funds transfers, quotations of money market rates, and cash flow forecasting are some of the areas where computerized decision support systems have been developed to help those responsible for cash management. Also investigated in this study is the extent to which surveyed companies make use of computers in cash management. Conflicts with other departments. Effective cash management requires information and active cooperation from other departments in the firm. The pursuit of fulfilling budget targets and corporate goals can result in opposing interests for different departments within the same enterprise. This survey tries to determine which departments are most likely to be in conflict with those responsible for cash management and how these conflicts are resolved. …