Showing papers on "Cash flow forecasting published in 2000"

Capital Cash Flows: A Simple Approach to Valuing Risky Cash Flows

Abstract: This paper presents the Capital Cash Flow method for valuing risky cash flows. I show that the Capital Cash Flow method is equivalent to discounting Free Cash Flows by the weighted average cost of capital. Because the interest tax shields are included in the cash flows, the Capital Cash Flow approach is easier to apply when the level of debt changes or when a specific amount of debt is projected. The paper also compares the Capital Cash Flow method to the Adjusted Present Value method and provides consistent leverage adjustment formulas for both methods.

Hedging and Liquidity

Abstract: This article develops a model for evaluating alternative hedging strategies for financially constrained firms. A key advantage of the model is the ability to capture the intertemporal effects of hedging on the firm’s financial situation. We characterize the optimal hedge. A wide range of alternative hedging strategies can be specified and the model allows us to determine in each case if the hedging strategy raises or lowers firm value and by how much. We show that hedging firm value, hedging cash flow from operations and hedging sales revenue are not optimal. The article highlights the fact that every hedging strategy comes packaged with a borrowing strategy which requires careful consideration. Futures markets often provide the most liquid and convenient instruments for managing risk. However, because futures contracts are marked to market, it is often impossible to simultaneously hedge cash flows and values. For example, a futures contract that locked in the value of gold that a corporation planned to extract in one year would generate an uncertain cash flow pattern over the year. This article examines how liquidity and cash flow timing problems associated with different hedging strategies can affect a firm’s value. In our model, the objective for hedging is to increase the firm’s financial flexibility. An optimal hedge maximizes the firm’s liquidityslack in the form of excess cash or unused debt capacitywhen liquidity is most valuable. This lowers the danger of costly financial distress, reduces the effective cost of external financial constraints, and makes value maximizing investments affordable. A firm with no financial constraints does not gain from hedging, and the higher the firm’s financial constraints the greater the potential value of hedging. The value of hedging depends critically on the design of the hedging strategy. We show that the optimal hedge minimizes the variability in the marginal value of the firm’s cash balances. Such a hedge efficiently redistributes cash balances across different states and periods, taking cash from those states for which the marginal cost of the financial constraint is low and giving cash to those states for which the marginal

The Predictive Ability of Direct Method Cash Flow Information

Abstract: This research examines the predictive ability of direct method cash flow information for firms that use the direct method in their cash flow statements. We use cross sectional and pooled time series regressions to predict operating cash flow data and assess relative predictive ability. Principal findings are: (1) past period direct method cash flow data predict future operating cash flow better than indirect method cash flow data; (2) past period direct method gross operating cash flows predict future net operating cash flow better than past period net operating cash flow; (3) measurement error exists in estimates of direct method operating cash flows from other financial statement data; (4) past operating cash flows predict future operating cash flows better than earnings and accruals.

Cash Flow Is King? Cognitive Errors by Investors

Abstract: When investors fixate on current earnings, they commit a cognitive error and fail to fully value the information contained in accruals and cash flows. Extending the accrual anomaly documented by Sloan [1996], we identify significant excess returns from a cash flow-based trading strategy. The market consistently underestimates the transitory nature of accruals and the long-term persistence of cash flows. We find that the accrual anomaly derives from the poor performance of high accrual firms, which are more likely to manage earnings. Combining the accrual and cash flow information also reveals that investors misvalue the quality of earnings. Contrary to Fama [1998], these anomalies are robust to the three-factor model with equally or value-weighted portfolio returns.

The Market for Corporate Control and Corporate Cash Holdings

Abstract: Conventional wisdom asserts that firms with large cash holdings are likely takeover targets. Using hostile takeover activity from 1985-1994, I find the probability a firm will be acquired decreases with cash. This holds for firms with excess cash as well as those with poor investment opportunities. Cash decreases acquisition probability by deterring potential bids, but does not increase premiums offered when bids occur. Finally, cash decreases after passage of antitakeover legislation. Thus, managers may hold cash to entrench themselves at shareholders' expense. Consequently, the market for corporate control does not monitor corporate cash holdings. Rather, cash may decrease such monitoring.

The Usefulness of Direct and Indirect Cash Flow Disclosures

Abstract: We investigate the ability of disclosed operating cash flow and indirect accruals components to explain annual returns for a sample of Australian firms. Consistent with claims made by accounting standard setters, we find evidence of significant explanatory power for disclosed operating cash flow components beyond aggregate operating cash flows when they also have significant incremental predictive power for future (one year ahead) operating cash flows. Accrual components also have incremental explanatory power for returns. In addition, we find evidence of significant explanatory power for operating cash flow components beyond estimates of the components (based on other financial statement disclosures) for firms with large differences between disclosed and estimated components.

Capturing the Option Value of R&D

Abstract: This simple model for valuing R&D opportunities is based on cost and revenue projections routinely used to determine the NPh of investment alternatives. OVERVIEW: Real option models capture the value of flexibility in R&D projects. This value lies in the fact that management always has the option to abandon the project if the results of R&D are not promising, thus limiting losses to the amount invested in the R&D phase. Traditional net present value (NPV) analysis fails to recognize this flexibility and therefore tends to undervalue R&D opportunities. The Black-Scholes model has been used extensively for financial options, but may be difficult to apply to R&D projects. Instead, it is suggested that the cost and revenue cash flows associated with implementing a project be used to measure the option value of R&D. This model captures the uncertainty associated with cash flow projections while simplifying some of the assumptions and data required for the Black-Scholes model. The similarities between a stock option and R&D project have been recognized in the literature for several decades. Both options give the investor the opportunity to capitalize on future earnings while limiting the potential loss. Like stock options, an R&D project with a large variance in expected returns is more attractive than one with a small variance, given that both projects have equal average returns, because the project with the larger variance has the potential of a much larger payoff with no additional cost (if it fails, the loss is limited to the R&D investment). Unfortunately, traditional discounted cash flow analysis fails to recognize the value of this flexibility. The result is that R&D projects are undervalued and often rejected due to a negative net present value. Realizing that the option value of an R&D project should be captured when analyzing investment opportunities, several authors have suggested using option pricing theory to value R&D (1-3). The most widely accepted financial option model is the Black-Scholes model (4), and a number of authors have applied it to R&D projects (5-7. However, the assumptions required by these models may present practitioners with some difficult problems. For example, the Black-Scholes model assumes that the future value of the stock, or in the case of R&D the value of the cash flows received if the R&D results are implemented, is distributed lognormally and cannot be negative. This may not be the case with every R&D project. Trigeorgis (8,9) discussed the problem of determining the value of the underlying asset for a real option (a parameter required for the Black-Scholes model). Essentially, if the underlying asset is not traded in the market (as is the case for R&D projects), it is difficult, if not impossible, to establish this value. Finally, recognize that the volatility in the Black-Scholes models is derived from the "price relative" (final stock price divided by initial stock price) and obtained from historical data, which does not usually exist for R&D projects. Rather than using traditional financial options models, some authors have taken a decision analysis approach to the problem. For example, Morris, Teisberg and Kolbe described how projects with negative net present value have a positive value when the option to abandon is incorporated in the model (10). They illustrated this for projects whose net cash flows are normally distributed. Other authors have used similar approaches (11, 12). The advantage of this approach is that it eliminates the need to make some of the possibly unrealistic assumptions required by the Black-Scholes model. However, it still requires management to estimate the distribution of net cash flows. While this may be possible, it is more likely that management will have access to two separate estimates: production and marketing costs, and anticipated revenues. …

Hedging and Reserving for Single-Premium Segregated Fund Contracts

Abstract: Three methods for determining suitable provision for maturity guarantees for single-premium segregated fund contracts are compared. Actuarial reserving assumes funds are held in risk-free assets, to give a prescribed probability of meeting the guarantee liability. Dynamic hedging uses the Black-Scholes framework to determine the replicating portfolio. Static hedging assumes a counterparty is willing to sell the options required to meet the guarantee. Using a stochastic cash flow projection, we consider how to assess which approach is most profitable. The example given assumes a typical Canadian segregated fund contract.

Substitution of Noncash Payment Instruments for Cash in Europe

Abstract: The substitution of noncash (check, giro, and credit and debit card) payments for cash transactions is difficult to gauge because there are no data series on the actual value or volume of cash transactions in any country. However, determining the degree of cash substitution is important because it will negatively affect the central banks' and governments' seigniorage revenue. We utilise a novel method for approximating the volume of cash transactions using public information on currency stocks and noncash payments. Applying this method, we estimate how cash has been substituted by other payment instruments in 10 European countries. We also provide a forecast of future cash use by country. We find that the trend in cash substitution across countries is quite similar. However, the countries themselves are at significantly different stages of this substitution process. The spread of debit and credit card payments has been the key factor behind the substitution away from cash as use of e-cash innovation is still in its infancy. Country-specific differences in the substitution process are largely explained by differences in the level of implementation of each country's card payment technology.

Corporate hedging: the impact of financial derivatives on the broad credit channel of monetary policy

Abstract: This complementary paper to Froot, Scharfstein, and Stein (1993) seeks to explore some of the corporate finance foundations of monetary economics. In particular, we investigate the impact of corporate risk management strategies on the monetary transmission mechanism. We employ a simple model of a financial accelerator (synonymously: a broad credit channel of monetary policy transmission) to argue that information asymmetries - which are at the heart of these models of the transmission mechanism - create incentives for corporate hedging programmes, that is, cash flow management. These policies, in turn, diminish the impact of monetary policy measures, which is reduced to the pure cost-of-capital effect.

Cash Flow, Investment, and Hedging

Abstract: Using a sample of SP to further controls for leverage, size, and diversification; and to controls for the endogeneity of the hedging decision. Finally, we find additional evidence supporting the effectiveness of hedging as indicated in the above model: hedgers reduce the volatility of net cash flow significantly more than non-hedgers.

Association of market, mission, operational, and financial factors with hospitals' level of cash and security investments.

Abstract: Using a resource dependency framework and financial theory, this study assessed the market, mission, operational, and financial factors associated with the level of cash and security investments in hospitals. We ranked hospitals in the study sample based on their cash and security investments as a percentage of total assets: hospitals in the high cash/security investment category were in the top 25th percentile of all hospitals; those in the low cash/security investment group were in the bottom 25th percentile. Findings indicate that high cash/security investment hospitals are under either public or private nonprofit ownership and have greater market share. They also serve more complex cases, offer more technology services, generate greater profits, incur a more stable patient revenue base, and maintain less debt.

Hubungan Kandungan Informasi Arus Kas, Komponen Arus Kas dan Laba Akuntansi dengan Harga atau Return Saham

Abstract: The Indonesian Institute of Accountants (IAI) published the Statement of Financial Accounting Standard (PSAK) No. 2, “Statement of Cash Flows” requires companies to publish the statement of cash flows beginning from January 1, 1995. The objective of the study is to examine the association of information content of total cash flows, components of cash flows, and accounting income with stock prices or stock returns. Another objective of the study is to compare the predictive power of between of total cash flows and accounting income with their relation to stock prices or stock returns. As much as 54 manufacturing firms listed in the Jakarta Stock Exchange (BEJ) were taken as a sample using a purposive sampling method. Data from audited financial statements were taken from Indo-exchange files. The statistics method used to test hypotheses is a linear multiple regression. Two models were considered: levels and return models. The multicollinearity test shows that there is no association between independent variables in the regression models, indicating multicollinearity is a serious problem. The heteroscedasticity test shows that variances of disturbances are constant for all observation in independent variables. Therefore, heteroscedasticity is not a problem. Results from diagnostic tests suggest that regression models used in this study are unbiased. The empirical results indicate that disaggregation of total cash flows into their components as required by PSAK No.2 are significantly associated with stock prices in the levels model. This means that the accounting authority has correctly mandated the publication statement of cash flows. In contrast, the results of the study indicate that total cash flows, components of cash flows, and accounting income are not associated with stock returns in the return model.

Cash flow forecasting using supervised and unsupervised neural networks

Abstract: Examines the use of neural networks as both a technique for pre-processing data and forecasting cash flow in the daily operations of a financial services company. The problem is to forecast the date when issued cheques will be presented by customers, so that the daily cash flow requirements can be forecast. These forecasts can then be used to ensure that appropriate levels of funds are kept in the company's bank account to avoid overdraft charges or unnecessary use of investment funds. The company currently employs an ad-hoc manual method for determining cash flow forecasts, and is keen to improve the accuracy of the forecasts. Unsupervised neural networks are used to cluster the cheques into more homogeneous groups prior to supervised neural networks being applied to arrive at a forecast for the date each cheque will be presented. Accuracy results are compared to the existing method of the company, together with regression and a heuristic method.

BOT Projects in Taiwan: Financial Modeling Risk, Term Structure of Net Cash Flows, and Project at Risk Analysis

Abstract: The build-operate-transfer (BOT) model is one of the most important privatization schemes used for construction of a nation9s infrastructure. There has been little discussion about how to use a simulation methodology in the financial scenario analysis of a bot project. This article suggests a Project at Risk (PAR) analysis based on a simulation technique using the value at risk methodology. A term structure of net cash flow curve also is developed top analyze the economic characteristics of bot financial plans.

Investment Spending in the Netherlands : The Impact of Liquidity and Corporate Governance

Abstract: This paper examines the relation between cash flow, corporate governance and fixed-investment spending. In perfect capital markets we expect no systematic relationship. However, Myers and Majluf's (1984) asymmetric information hypothesis and Jensen's (1986) managerial discretion hypothesis present imperfections and predict a positive impact of cash flow on investment in fixed assets. Aspects of corporate governance play an important role in both theories. We measure the impact of cash flow on investment for a set of Dutch firms and aim to distinguish between the asymmetric information hypothesis and the managerial discretion hypothesis. Our findings show that cash flow is an important determinant of investment expenditures. The impact of cash flow is largest for firms with low growth opportunities suggesting that the managerial discretion hypothesis is most at work in the Dutch setting. We also discern that the impact of governance characteristics on both investment and the cash flow-sensitivity of investment differ between firms having low and high growth opportunities. This implies that governance affects the managerial discretion and asymmetric information hypotheses differently.

Do Persistent Large Cash Reserves Lead to Poor Performance

Abstract: Conservative financial policies are often criticized as serving the interests of managers rather than the interests of stockholders. We examine the operating performance and other characteristics of firms that for a five-year period held more than one-fourth of their assets in cash and cash equivalents. Following the five-year period operating performance of high cash firms is comparable to or greater than the performance of firms matched by size, industry, or prior performance. In addition, proxies for managerial incentive problems, such as ownership and board characteristics, are not unusual and do not explain differences in operating performance among high cash firms. We conclude that persistent large holdings of cash and equivalents have not hindered corporate performance.

Accounting and Finance for Your Small Business

Abstract: Preface. Section I: Preparing to Operate the Business. Chapter 1: Budgeting for Operations. Definition or Purpose of an Operating Budget. Signs of Budget Ineffectiveness. Improvements to the Budgeting System. Responsibility Accounting. Budget Tracking and Maintenance. The System of Interlocking Budgets. Need for Budget Updating. Summary. Chapter 2: Investing in Long-Term Assets and Capital Budgeting. Definitions. Overview and Use of Capital Budgeting. Life Cycles. Capital Budgeting Sequence. Producing Numbers to Get Dollars, the Use of Forms, and the Capital Budgeting Model. Miscellaneous Considerations. Product Discontinuance. Bailout. Summary. Appendix: Examples and Comparison of Calculations. Chapter 3: Basic Control Systems. The Need for Control Systems. Types of Fraud. Key Controls. When to Eliminate Controls. Summary. Section II: Operating the Business. Chapter 4: Cash Flow Concerns. Cash. What to Do with Excess Cash. Cash Flows. Introduction to Cash Flow Budgets. Indications of Cash Flow Problems. Managing Cash. Preparation of the Cash Budget. Disbursements. Net Cash Flow and Cash Balances. Exceptions to Expected Cash Flows. Summary. Appendix: Cash Flow Example. Chapter 5: Financing. New Businesses. Zero Working Capital and Zero Fixed Assets. Types of Financing. Private Placement of Stock. Swapping Stock for Expenses. Stock Warrants. Stock Subscriptions. How to Obtain a Bank Loan. Sources of Debt Financing. Types of Loan Arrangements. Restrictions on Loans. Conditions That a Borrower Should Seek. Summary. Section III: Evaluating the Operations of the Business. Chapter 6: Performance Measurement Systems. Financial Ratios. Types of Financial Ratios. Using Performance Measurements for Predictions. Operating Ratios. Other Ratios. The Balanced Scorecard. Summary. Chapter 7: Financial Analysis. Risk Analysis. Capacity Utilization. Breakeven Analysis. Summary. Chapter 8: Taxes and Risk Management. Controlling Tax Liabilities. Risk Management. Insurance. Types of Insurance Companies. Claims Administration. Summary. Chapter 9: Reporting. Federal Government Requirements. State Government Requirements. Local Government Requirements. Creditors. Equity Holders. Management Reports. Summary. Index.

Cash management in health care systems.

Abstract: Cash is one of the most precious assets held by health systems. This article presents results of discussions on cash management and investment policies at a dozen major not-for-profit health systems. Health system data indicate that cash holdings have increased dramatically since 1993, mostly due to investment earnings. Discussions with chief financial officers of these health systems reveal that cash holdings are significant, that decisions about cash balances are strategic, and that most systems aim to increase cash balances to levels that permit access to capital markets on more favorable terms.

Fair Electronic Cash Systems with Multiple Banks

Abstract: We propose a model for fair electronic cash issued by multiple banks for the first time. A scheme of electronic cash with multiple banks in which a user can be traced is presented by using the improved group signature scheme of Cam97[4] and the group blind signature scheme of Lys98[14]. A weakness in the design of withdrawal and payment protocols using the existing group signature schemes is pointed out with its reasons analyzed.

Scientific financial management : advances in intelligence capabilities for corporate valuation and risk assessment

Abstract: Introduction to scientific financial management fundamentals of portfolios and option analysis real options - a must technique creating visual financial models cash flow re-engineering micro project analysis and cash flow and sustainable growth statistical forecasting methods and modified percent of sales how to apply Monte Carlo analysis to financial forecasting neural networking linear programming, optimisation and the CFO risk analysis of the corporate entity and operation segments. Section 1 - segment analysis section 2 - corporate risk analysis a primer on shareholder value - from basics to Monte Carlo.

Inventory investment and cash flow

Abstract: This paper uses a panel of UK manufacturing firms to examine whether the effect of cash flow on inventory investment reflects the presence of financially constrained firms. Financially constrained firms are identified using a number of criteria, including the criterion suggested by Bond and Meghir (1994) based on the firm's financial policy. The main finding is that the effect of cash flow on inventory investment is concentrated among firms identified as financially constrained using either their financial policy or a criterion based on their current ratio. This suggests that there is no unique criterion for identifying financially constrained firms using financial information in company accounts. Contrary to what previous studies have found, using firm size or the coverage ratio to define financially constrained firms does not reduce the effect of cash flow on the inventory investment of unconstrained firms. This raises doubts about whether these are accurate indicators of whether a firm is financially constrained. Combined with Bond and Meghir's similar findings for fixed investment, the results in this paper suggest that cash flow effects form part of the monetary transmission mechanism.

Cash Flow Forecasting and Liquidity

Abstract: This series of financial management titles breaks new ground in simplicity, clarity and ease of application on the complex subject of risk management -- a crucial business tool. These are time-tested training tools, whether for classroom application or individual study. Each title in the series makes use of extensive case studies, adapted specifically for a sophisticated international audience.Topics include: -- planning and preparation for the process of forecasting cashflow-- understanding the importance of liquidity in financial management-- establishing baseline forecasting models-- case studies in forecasting and liquidity-- sample exercises

Bank Commitment Relationships, Cash Flow Constraints, and Liquidity Management

Abstract: Evidence in this paper suggests that a close banking relationship—a loan commitment in particular—relaxes cash flow and cash management constraints on firms. Given firms' prospects (Q), the investment and cash flow correlation is substantially lower when firms have a bank loan commitment. The difference in cash flow sensitivity reflects differences in firms' cash management practices in the face of cash flow shocks. Firms with a commitment simply run down their stocks of cash (or borrow more) when their cash flow falls but their investment prospects remain strong. The different investment-cash flow sensitivities and cash management practices suggest that the firms with a bank commitment relationship are less financially constrained.

Valuing Cyclical Companies

Abstract: Cyclical stocks such as airlines and steel can appear to defy valuation. But an approach based on probability will help managers and investors draw up a reasonable estimate. Companies in industries prone to significant swings in profitability present special difficulties for managers and investors trying to understand how they should be valued. In extreme cases, companies in these so-called cyclical industries--airline travel, chemicals, paper, and steel, for example--challenge the fundamental principles of valuation, particularly when their shares behave in ways that appear unrelated to the discounted value of their underlying cash flows. e believe, however, that cyclical operations can be valued using a modified discounted-cash-flow (DCF) method similar to an approach used to value high-growth Internet start-ups. [1] First, though, we will explore the underlying relationships between the cash flows and share prices of cyclical companies, as well as the role securities analysts may well play in distorting market expectations of performance. When theory and reality conflict Suppose that you are using the DCF approach to value a cyclical company and have perfect foresight about its industry cycle. Would you expect the value of the company to fluctuate along with its earnings? The answer is no; the DCF value would exhibit much lower volatility than earnings or cash flow because DCF analysis reduces expected future cash flows to a single value. No individual year should have a major impact on the DCF value because high cash flows cancel out low ones. Only the long-term trend matters. Company A, for example, has a business cycle of ten years and a highly volatile cash flow pattern that ranges from positive to negative (Exhibit 1, part 1). These cash flows can then be valued on the basis of the forecast from any one year forward. Discounting the free cash flows at 10 percent produces the DCF values in Exhibit 1, part 2. Exhibit 1, part 3, which brings together the cash flows and the DCF value (indexed for comparability), shows that the DCF value is far less volatile than the underlying cash flow. Indeed, there is almost no volatility in the DCF value, because no single year's performance affects it significantly. In the real world, of course, the share prices of cyclical companies are less stable. Exhibit 2 shows the earnings and share values (indexed) for 15 companies with four-year cycles. The share prices are more volatile than the DCF approach would predict--suggesting that theory and reality conflict. Are earnings forecasts the culprit? How can theory and reality be reconciled? On the assumption that the market values of companies are linked to consensus earnings forecasts, we examined these forecasts for clues. What we found was surprising: consensus earnings forecasts appeared to ignore cyclicality entirely by almost always showing an upward trend, regardless of whether a company was at the peak or the trough of a cycle. Apparently, the DCF model is consistent with the facts, but the earnings and cash flow projections of the market are not (assuming that the market followed the analysts' consensus). This conclusion was based on an analysis of 36 cyclical companies in the United States between 1985 and 1997. We divided these companies into groups with similar cycles (three, four, or five years from peak to trough, for example) and calculated indexed average earnings and consensus earnings forecasts for each. We then compared actual earnings with forecast earnings over the course of the cycle. [2] Exhibit 3 plots the actual and forecast consensus earnings for 15 of the companies, in the primary-metals or transportation equipment manufacturing industries. All have four-year cycles. As the exhibit shows, the consensus forecasts don't predict the earnings cycle at all. In fact, except for the next-year forecasts in the years at the bottom of the trough, earnings per share are forecast to follow an upward path, with no variation. …

An Assessment of Risk Factors Involved in Modeling Cash Flow Forecast

Abstract: Many models have been developed to assist contractors and clients in their cash flow forecasting. The majority of these have been based on standard cash flow S-curves, developed using the traditional manual approach, mathematical and statistical models.Many of these models failed to consider and analyse the factors responsible for the considerable variations in the modelled cash flow profiles. This study as a first step in a knowledge-based expert system (KBES) modelling of construction cash flow to incorporate risk and uncertainties, identified and assessed the risk factors responsible for the variation in construction cash flow profiles. The study was conducted through a questionnaire survey administered on contracting organisations. Analyses were carried out using mean response and univariate analysis of variance (ANOVA). Results showed that the major risk factors involved in cash flow forecasting relate to changes in the design or specifications, contract conditions pertaining to cash in flow, interim valuations and certificates and construction programming issues such as inclement weather. Results also indicated that cash flow forecasting modelling that incorporates risk would need to consider categorisation along the groupings of firm size, procurement methods and construction duration.