Showing papers on "Cash flow statement published in 2003"

International Corporate Governance and Corporate Cash Holdings

Abstract: Agency problems are an important determinant of corporate cash holdings. For a sample of more than 11,000 firms from 45 countries, we find that corporations in countries where shareholders rights are not well protected hold up to twice as much cash as corporations in countries with good shareholder protection. In addition, when shareholder protection is poor, factors that generally drive the need for cash holdings, such as investment opportunities and asymmetric information, actually become less important. These results are stronger after controlling for capital market development. Indeed, consistent with the importance of agency costs, we find that firms hold larger cash balances when access to funds is easier. Our evidence is consistent with the conjecture that investors in countries with poor shareholder protection cannot force managers to disgorge excessive cash balances.

Why Do Firms Hold Cash? Evidence from EMU Countries

Abstract: This paper investigates the determinants of corporate cash holdings in EMU countries. Our results suggest that cash holdings are positively affected by the investment opportunity set and cash flows and negatively affected by asset's liquidity, leverage and size. Bank debt and cash holdings are negatively related, which supports that a close relationship with banks allows the firm to hold less cash for precautionary reasons. Firms in countries with superior investor protection and concentrated ownership hold less cash, supporting the role of managerial discretion agency costs in explaining cash levels. Capital markets development has a negative impact on cash levels, contrary to the agency view.

Do Persistent Large Cash Reserves Hinder Performance

Abstract: Conservative financial policies are often criticized as serving the interests of managers rather than the interests of stockholders. We test this argument by examining 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 and industry or by a measure of proclivity to hold substantial cash. 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 find that high cash holdings are accompanied by greater investment, particularly R&D expenditures, and by greater growth in assets. For firms that persistently hold large cash reserves, we conclude that such policies support investment without hindering corporate performance.

The Cash Flow Sensitivity of Cash

Abstract: We use the link between financial constraints and a firm's demand for liquidity to develop a new test of the effect of financial constraints on firm policies. The effect of financial constraints can be captured by a firm's propensity to save cash out of incremental cash inflows (the "cash flow sensitivity of cash"). While constrained firms should have a positive cash flow sensitivity of cash, unconstrained firms' cash savings should not be systematically related to cash flows. We estimate the cash flow sensitivity of cash using a large sample of manufacturing firms over the 1971-2000 period and find that firms that are more likely to be financially constrained display a significantly positive cash flow sensitivity of cash, while unconstrained firms do not. Also consistent with our argument, we find that constrained firms' cash flow sensitivity of cash increases during recessions, while unconstrained firms' cash--cash flow sensitivity is unaffected by macroeconomic innovations. The use of cash flow sensitivities of cash appears to be a theoretically justified, empirically useful method to test for the importance of financial constraints.

Cash flow, investment, and investment opportunities: New tests using UK panel data

Abstract: The interpretation of the correlation between cash flow and investment is highly controversial. Some argue that it is caused by financial constraints, others by the correlation between cash flow and investment opportunities that are not properly measured by TobinOs Q. This paper uses UK firmsO contracted capital expenditure to capture information about opportunities available only to insiders and thus not included in Q. When this variable is added in investment regressions, the explanatory power of cash flow falls for large firms, but remains unchanged for small firms. This suggests that the significance of cash flow stems from its role in alleviating credit frictions.

Investment, R&D and financial constraints in Britain and Germany

Abstract: This paper tests for the importance of cash flow on investment in fixed capital and R&D using firm-level panel data in two countries between 1985 and 1994. For German firms, cash flow is not informative in simple econometric models of fixed investment or R&D. In identical specifications for British firms, cash flow is informative about investment, although not about the level of R&D spending conditional on the R&D participation decision. In the UK, we also find that investment is less sensitive to cash flow for R&Dperforming firms, and that cash flow predicts whether firms perform R&D or not. We confirm that these differences do not simply reflect a greater role for current cash flow in forecasting future sales. These results suggest that financial constraints are more significant in Britain, that they affect the decision to engage in R&D rather than the level of R&D spending by participants, and that consequently the British firms that do engage in R&D are a self-selected group where financing constraints tend to be less binding.

Deflators, net shareholder cash flows, dividends, capital contributions and estimated models of corporate valuation

Abstract: Models of corporate valuation based upon a symmetric distribution of information suggest that net shareholder cash flows (the difference between dividends and capital contributions) should have a negative impact on corporate valuation (see, for example, Ohlson, 1989). Using a cross-sectional valuation model approach, a number of studies have empirically investigated this relationship, directly or indirectly. Rees (1997) estimates that dividends have a positive impact on corporate valuation in the UK. He does not estimate the impact of capital contributions, however. In the USA, Rees’ (1997) result is repeated by Hand and Landsman (1999), who also observe a coefficient for capital contributions more in line with symmetric information theory. If these results of a positive relationship between dividends and market value are accepted at face value, they could be consistent with signalling models, based upon an asymmetric

The Differential Persistence of Accruals and Cash Flows for Future Operating Income Versus Future Profitability

Abstract: Prior research provides evidence that a higher proportion of accrued relative to cash earnings is associated with lower earnings performance in the subsequent fiscal year. The result has been widely interpreted as indicative of higher levels of operating accruals relative to cash flows foreshadowing a subsequent earnings reversal, and thus signaling earnings management. We note, however, that earnings performance in prior studies is typically defined as one-year-ahead operating income divided by one-year-ahead invested capital, or a measure of profitability. We find that accruals are more highly associated than cash flows with invested capital in the denominator of the profitability measure. In contrast, accruals and cash flows have no differential relation to one-year-ahead operating income. The evidence is not consistent with accruals having a reversal effect on earnings. This suggests that the lower persistence of accruals versus cash flows may not be due to earnings management but may rather be due to the effect of growth on future profitability.

Wiley GAAP 2004: Interpretation and Application of Generally Accepted Accounting Principles

Abstract: Authoritative Accounting Pronouncements. Chapter 1. Researching GAAP Problems. Chapter 2. Balance Sheet. Chapter 3. Statements of Income and Comprehensive Income. Chapter 4. Statement of Cash Flows. Chapter 5. Cash, Receivables, and Prepaid Expenses. Chapter 6. Short-Term Investments and Financial Instruments. Chapter 7. Inventory. Chapter 8. Revenue Recognition--Evolving Principles and Specialized Applications. Chapter 9. Long-Lived Assets. Chapter 10. Investments. Chapter 11. Business Combinations and Consolidated Financial Statements. Chapter 12. Current Liabilities and Contingencies. Chapter 13. Long-Term Debt. Chapter 14. Leases. Chapter 15. Income Taxes. Chapter 16. Pensions and Other Postretirement Benefits. Chapter 17. Stockholders' Equity. Chapter 18. Earning Per Share. Chapter 19. Interim and Segment Reporting. Chapter 20. Accounting Changes and Correction of Errors. Chapter 21. Foreign Currency. Chapter 22. Personal Financial Statements. Chapter 23. Specialized Industry GAAP. Appendix A. Disclosure Checklist. Appendix B. International vs. US Accounting Standards. Index.

Proprietary versus Non-Proprietary Disclosures: Evidence from Germany

Abstract: Discretionary disclosure theory suggests that proprietary costs are an important reason why firms often withhold material information However, empirically testing this hypothesis has proven to be difficult, due especially to the elusive nature of proprietary costs and lack of settings in which proprietary disclosures are voluntary This paper exploits the fact that that until recently, German firms were not required to disclose business segment reports, which are generally viewed as competitively sensitive and proprietary in nature Analyzing firms' voluntary business segment disclosures, I find evidence consistent with the proprietary cost hypothesis As Germany now requires segment reporting by all listed firms, I also examine ex post whether segment reporting is more revealing for those firms that previously chose not to disclose I find that firms are less likely to voluntarily provide segment reports if segment profitability is more heterogeneous and the average profitability reported in the income statement is less revealing This finding is also consistent with the proprietary cost hypothesis and shows that segment disclosures are not governed by capital-market considerations alone I benchmark my findings using voluntary cash flow statement disclosures In comparison to segment reports, which likely reveal proprietary information to competitors, cash flow statements are less competitively sensitive I find that cash flow disclosures appear to be governed primarily by capital-market considerations This finding lends further support to the proprietary cost interpretation of the segment reporting results

Larger Return to Cash Acquisitions: Signaling Effect or Leverage Effect?*

Abstract: This article investigates the signaling theory and the benefit of debt theory to explain higher returns for bidders offering cash rather than stock, using Standard and Poor’s debt rating reviews and changes. Results imply that cash acquisitions and stock acquisitions have different sources of value creation. Benefit of debt seems to be the main source of value in cash acquisitions, whereas the synergy effect outweighs the leverage effect in stock takeovers. Although stock appears to be used for the most unsuccessful acquisitions, this study does not find convincing evidence that cash is used for good acquisitions.

Corporate governance and investment

Abstract: This article contributes in at least three ways to the investment‐cash flow literature. First, it finds that the corporate governance environment of a firm affects the relationship between investment and cash flow. Second, it allows for both asymmetric information and managerial discretion explanations for positive investment‐cash flow coefficients, thereby overcoming most of the ambiguities in this interpretation. Finally, by using a GMM estimator most of the problems with traditional OLS models are avoided. It is found that family‐controlled firms appear to suffer from cash constraints as evidenced by a positive and robust relationship of investment to cash flow. State‐controlled firms also exhibit a positive and significant cash flow sensitivity, which we explain by managerial discretion.

Financing Construction: Cash Flows and Cash Farming

Abstract: Cash is king, not least in the construction industry. Recent government-commissioned reports have highlighted the importance of better financial management in the construction industry. This professional text provides a considered analysis of the tools and techniques of project financial management in construction; notably it covers cash flow modelling and provides the first detailed investigation of the contentious issue of cash farming. Through use of case studies, worked examples and questions this book will appeal to practitioners and students alike.

Cash flow aggregation system and method

Abstract: A data construct represents a financial asset in a data processing system. The data construct comprises description data, a cash flow map, and process instructions. The description data further comprises creation, purpose, and transaction information data describing the financial asset. The cash flow map further comprises information on cash flows that flow into the financial asset. The process instructions include information on cash flow processing for the cash flows that flow into the financial asset.

The Incremental Information Content of Earnings and Cash Flows from Operations Affected by Their Extremity

Abstract: Previous returns studies have shown that extreme earnings and extreme cash flows from operations are less informative than moderate (i.e., less extreme) earnings and moderate cash flows. Studies also report that cash flows supplement to earnings in firm valuation by showing a higher association of cash flows with returns when earnings are extreme than when earnings are moderate. We propose that this supplementary role of cash flows is affected by cash flows extremity. Using data from the US capital markets, we find that the supplementary role of cash flows exists only when cash flows are not extreme. We also investigate the supplementary role of earnings to cash flows and search for a higher association of earnings with returns when cash flows are extreme than when cash flows are moderate. Similar to results on cash flows, our findings show that the supplementary role of earnings exists only when earnings are not extreme. Our results imply that investors and researchers should consider both earnings and cash flows extremity when assessing the information content of these variables.

The decision usefulness of reported cash flow and accrual information in a behavioural field experiment

Abstract: While recent capital market studies tend to reveal some information content in cash flows, their results may not be generalisable to other contexts such as the assessment of solvency. Mandated acco...

An Empirical Analysis of the Relationship between Cash Flow and Dividend Changes in Nigeria

Abstract: The purpose of this study is to re-evaluate the incremental information content of cash flows in explaining dividend changes, given earnings. I carry out an 882 firm-year study by analysing the dividend changes-cash flow relationship on a sample of 63 quoted firms in Nigeria over a wider testing period from 1984 to 1997. Despite the fact that I used a wider testing period than previous studies and more refined cash flow measures than previous studies, I also introduced dummy variables to capture economic policy changes in the economy. The association of cash flows with dividend changes is tested using the modified Lintner-Brittain model as adopted in Charitou and Vafeas (1998) on pooled cross sectional/time series data from the full sample of observations from 1984-97. The models are estimated using the ordinary least squares (OLS) method and I do find a significant relationship between dividend changes and cash flow unlike previous studies. The empirical results reveal that the relationship between cash flows and dividend changes depend substantially on the level of growth, the capital structure choice, size of each firm and economic policy changes.

Development of a company‐level dynamic cash flow forecasting model (DYCAFF)

Abstract: Current methods of predicting cash flow have a number of significant weaknesses. At the project level, previous models are simple and incorporate only some of the variables affecting cash flow. On the company level, budgeting is performed on an overall basis (i.e. no account is taken of individual contracts). This is mainly due to the fact that a considerable amount of any year's turnover is contributed by contracts that have yet to be won (or even known of) at the time of the budget. This approach, in addition to being inaccurate, precludes the role of budgeting as a tool for strategy evaluation. This paper presents a dynamic cash flow forecasting model that would assist contractors to effectively plan and manage the cash flow of individual projects and at a company level. The advances made in the model can be represented by three of its main features. First, the development of a more accurate and complex cash flow calculation mechanism. Second, the development of an information system that will help the...

The Relative Relevance of Cash Flow and Accrual Information for Solvency Assessments: A Multi‐Method Approach

Abstract: This multi-method study reports the results of two complementary experiments investigating the relevance of cash flow and accrual information. A behavioural field experiment investigated differences in the accuracy of solvency assessments between commercial lending managers using cash flow information and those using accrual information. Results indicated that commercial lending managers using cash flow information made more accurate solvency assessments than managers using accrual information. Results of an archival quantitative modeling experiment complemented these results and indicated cash flow information had incremental information content beyond accrual information. Our results confirmed the decision-usefulness of cash flow information and supported the mandate of the Statement of Cash Flows.

Equivalence of Ten Different Methods for Valuing Companies by Cash Flow Discounting

Abstract: This paper shows that ten methods on company valuation using cash flow discounting (WACC; equity cash flow; capital cash flow; adjusted present value; residual income; EVA; business's risk-adjusted equity cash flow; business's risk-adjusted free cash flow; risk-free-adjusted equity cash flow; and risk-free-adjusted free cash flow) always give the same value when identical assumptions are used. This result is logical, since all the methods analyze the same reality based upon the same assumptions; they only differ in the cash flows taken as the starting point for the valuation. We present all ten methods allowing the required return to debt being different from the cost of debt. Seven methods require an iterative process. Only APV and the business risk-adjusted cash flows methods do not require iteration.

Valuation Effects of Corporate Cash Holdings: Evidence from Germany

Abstract: Cash holdings obviously play an important role in financial management of corporations: the largest firms in the world held 1.5 trillion USD in cash and marketable securities in 1998. Finance theory however has not dealt with this subject in detail until the mid 90's. Especially concerning the valuation effects of corporate cash holding empirical studies are very rare. Harford (1999) finds that cash-rich firm engage in value destroying acquisitions. Opler et al. (1999) report that firms use excess cash in order to finance operating losses. Mikkelson/Partch (2002) analyze firms with persitent large cash reserves but do not report significant effects on performance. We contribute to this literature in two ways: first, we adapt and refine the methodology of Mikkelson/Partch (2002) and do find a significant operating underperformance of German firms that previously held excess cash over a three-year period. This can be interpreted as evidence for agency based hypotheses stating that large excessive cash holdings represent stocks of free cash flow which may be invested inefficiently by managers. Second, we study direct valuation effects of corporate cash holdings by constructing excess enterprise values of firms using an adaptation of the Berger/Ofek (1995) valuation algorithm. Our results suggest that both positive and negative deviations from the industry median cash to sales ratio have a significant impact upon excess value. While lower than median cash to sales ratios yield lower excess values - thus at least in part supporting our joint version of the trade off hypothesis of corporate cash holdings - positive deviations have a positive impact upon excess values. So in an overall perspective our results fail to support our joint version of the trade off hypothesis.

Dealmaking Using Real Options and Monte Carlo Analysis

Abstract: CHAPTER 1: Introduction. Why Another Negotiating Book? iDealmaking(t). High Significance, High Ambiguity Contexts. The "So What?" Question. Valuation, Pricing, and Negotiation. Tangible and Intangible Content/Value and the New Economy. The iDealmaking Process. Organization of the Book. CHAPTER 2: Negotiation People, Language, and Frameworks. Negotiation People. A Quest. The Nut, the Number, the Bogie, and the Toe Tag. Quantification, Rationality, and Hyperrationality. CHAPTER 3: The Box and the Wheelbarrow: What Am I Selling (or Buying)? The Box. The Wheelbarrow. iDealmaking's Spine. The Term Sheet. Methods and Tools. CHAPTER 4: Discounted Cash Flow Analysis and Introduction to Monte Carlo Modeling. Discounted Cash Flow Analysis. Scenario (DCF) Analysis. Monte Carlo Method: An Introduction. Closure and Application to Negotiation. CHAPTER 5: Monte Carlo Method. A Model Cash Flow Template. Income and Cash Flow Statements: 3M Example. Monte Carlo Assumption Tools. Uniform Distribution: Highest Uncertainty Between Certain Bounds. Triangular Distribution. The Normal Distribution. Other Distribution Functions. Monte Carlo Model of the DCF Template. Combined CAGR and Cost Ratio Uncertainty Distributions. Correlating Assumptions. Additional Assumption Distributions. Twentieth (and Other) Percentile Valuations. Comparison of Monte Carlo Results with DCF (RAHR) Method. Scenario Modeling in Monte Carlo. Monte Carlo Tools for Determining Variable Significance. Final Points on the Monte Carlo Model. Appendix 5A: Crystal Ball Report Corresponding to the Results Presented in Exhibit 5.15 for a Uniform Cost Distribution Assumption. Appendix 5B: Crystal Ball Report Corresponding to the Results Presented in Exhibit 5.16 for a Double-Humped Cost Distribution Assumption. CHAPTER 6: Introduction to Real Options. Perspective 1: Discounted Cash Flow (DCF) View of the Six-Scenario Opportunity. Perspective 2: Real Option View of the Six-Scenario Opportunity. Perspective 3: A Model for a Buyer's Counteroffer. Black-Scholes Equation for Option Pricing. The Black-Scholes Equation Applied to an Option to a Share of Yahoo! What Do Equations Represent? "What Is Truth?". Using Black-Scholes for an Opportunity Valuation . Summary of Real Option Realities versus Black-Scholes. CHAPTER 7: Real Options Applied to Dealmaking. Beyond Black-Scholes. Emergence of Real Options Analysis. Introducing the Binomial Lattice for Real Options. Calculating Option Values from Binomial Matrices. Calculating Option Values Using Decisioneering's Real Options Analysis Toolkit. Using Real Options Analysis Toolkit Software in Dealmaking. Calculating (or Estimating) Option Volatility. Calculating the Option Value of Options on Options. Conclusions and Observations. Appendix 7A: Real Options Equations. CHAPTER 8: Knowledge and Unertainty. Future Knowledge. Dealing with Uncertainty. Standards. What About Truth? CHAPTER 9: Deal Pricing. Simple Pricing. Box Pricing. Wheelbarrow Pricing. Total Cash Payment. Cash When. Cash Maybe. Cash As. Cash Substitutes. Term Sheets. CHAPTER 10: Negotiation Perspectives and Dynamics. Negotiation Perspectives. Negotiating Sequencing. Issue Explosion. Negotiating Values. Deal/Agreement Complexity. CHAPTER 11: Plan B. Auctions and Betrothals. Plan B Analysis and Tools. Plan B Implementation. Plan B Caution. Plan B from the Buyer's Perspective. Plan B and Life. CHAPTER 12: Conclusion. In Theory, In Practice. Value Creation by Dealmaking. A Final (True) Story. Bibliography. Index.

How Corporate Governance and Globalization Can Run Afoul of the Law and Good Practices in Business: The Enron's Disgraceful Affair

Abstract: The purpose of this paper is to set out the Enron's demise into the perspective of Corporate and Global Governance. To accomplish this target, the incremental cash flow model is expanded to give room for governance issues, while a functional introduction to information sets is developed, including bounded rationality, asymmetric information, opportunistic behavior, transaction costs and agency problems. Then, corporate governance is linked to globalization by means of some recent approaches that go beyond a narrow economic mindset to encompass a far-reaching dynamics. Taking advantage of such background, the Enron's story is tracked down over a span of fifteen years since its starting day to its bankruptcy filing. Leading events are explained from corporate and global governance viewpoints, while an in-depth analysis is worked out on Enron's complex game of deception and breach of contracts: the outrageous affiliated limited partnerships, the lavish pay package to its executives, the involvement with global governance through the Indian affair and the Taliban connection. It is for the incremental cash flow model to explain malfeasance with cash flows from assets, and how cash flows to creditors were actually contrived. Furthermore, to highlight how cash flows were swindled from stockholders and, finally, how Enron made wheeling and dealing with cash flows on behalf of its managers.

‘Shopping Around’ for Accounting Practices: The Financial Statement Presentation of French Groups

Abstract: This article illustrates the progressive move away from traditional accounting practices through a study of the presentation of financial statements. Based on a sample of one hundred large French industrial and commercial groups over a ten-year period, and applying a logistic regression method, our survey confirms a trend among French companies, which are increasingly turning their backs on traditional national practices as regards the balance sheet format, the income statement format, the voluntary disclosure of a statement of changes in shareholders’ equity and the cash flow statement format. This move towards ‘alternative’ practices is made possible by the flexibility of French regulation, and can probably be explained by the desire of French firms to attract more investment on international capital markets. However, this trend shows no signs of a clear orientation towards any particular accounting model (IAS, U.S. or U.K.). The behaviour of the French firms observed in our study can be considered as a kind of ‘shopping around’ for accounting practices.

The impact of firm‐specific attributes on the relevance in earnings and cash‐flows : a nonlinear relationship between stock returns and accounting numbers

Abstract: The role of accounting information in setting security prices is one of the most fundamental issues in accounting and finance. The purpose of this study is to extend the research on the value relevance of accounting numbers in three important directions. Firstly, we consider the French context and analyze if earnings and/or cash flows are relevant to explain stock returns. Secondly, we test whether the explanatory power of accounting variables can be improved by using a nonlinear specification. Thirdly, we investigate how firm‐specific attributes such as size, debt level and firm life‐cycle influence the relative relevance of accounting measures (earnings and cash flows). Our results support a nonlinear relationship between stock returns and accounting variables. They indicate also that the relevance of earnings is conditional on size, debt level and life cycle of the firm. In contrast, the earnings change reveals more information when the firms are large, mature or characterized by a low degree of debt. These results are consistent with difference in earnings persistence between firms. With regards to cash flows, we find that they do not reveal additional information beyond that contained in earnings.

Usefulness of financial statement components in valuation: An examination of start-up and growth firms

Abstract: According to US financial accounting standards and prior research, accrual-based earnings provide the best measure of firm performance. Results from prior capital markets research imply that earnings are more value-relevant than operating cash. There are, however, potential problems in pooling cross-sectionally across all firms and assuming a homogeneous sample of companies. For many start-up and early growth companies, their earnings are non-positive. Other components of the financial statements may be more value-relevant than the bottom-line earnings. In early firm life cycle stages, growth opportunities are a relatively larger component of firm value than assets in place; in these stages, the proxy that provides more value-relevant information about firm-value is the one that provides more information about the future growth opportunities of the firm. This study examines both the incremental and relative usefulness of earnings, cash flow and book value financial statement components using various valua...

Corporate Valuation: A Guide for Managers and Investors

Abstract: PART I: BASIC CONCEPTS OF CORPORATE VALUATION 1 Why Corporate Valuation? 2 A Complete Corporate Valuation for a Simple Company Appendix 2 Comparing Bond and Stock Valuation Models with the Corporate Valuation Model PART II: INTERMEDIATE CONCEPTS OF CORPORATE VALUATION 3 Financial Statements and Free Cash Flow Appendix 3 Reconciling Free Cash Flow with the Statement of Cash Flows 4 Estimating the Value of ACME Appendix 4 Security Valuation PART III: PROJECTING FINANCIAL STATEMENTS 5 Projecting Free Cash Flows 6 Projecting Consistent Financial Statements: The Miracle of Accounting 7 Multiyear Projections and Valuation 8 Technical Issues in Projecting Financial Statements and Forecasting Financing Needs PART IV: VALUING ACTUAL COMPANIES WITH THE CORPORATE VALUATION SPREADSHEET 9 The Starting Point for Corporate Valuation: Historical Financial Statements Appendix 9 Why We Condense the Financials 10 The Condensed Financial Statements and Historical Analysis Appendix 10 Mapping the Comprehensive Statements to the Condensed Statements: Advanced Issues in Measuring Free Cash Flows 11 Estimating the Weighted Average Cost of Capital 12 Projecting Cash Flows for an Actual Company: Home Depot Appendix 12 Top-Down Analysis 13 The Valuation of an Actual Company: Home Depot Appendix 13 The Adjusted Present Value Method

Monetary Policy and Corporate Investment in France

Abstract: Using a large panel of 6946 French manufacturing firms, this paper investigates the effect of sales, of the cost of capital and of liquidity constraint variables (cash flow or cash stock) on the stock of capital from 1990 to 1999. The user cost elasticity is at the most 0.26 in absolute terms for all the firms of the sample. Three groups of firms representing around 20 per cent of the sample (firms facing a high risk of bankruptcy, firms belonging to the capital goods sector, firms making extensive use of trade credit) are more sensitive to cash flow. Risky firms are less sensitive to sales, when cash stock replaces cash flow. Simulations following shocks of interest rate (related to monetary policy shocks), provides short run contemporaneous elasticities of investment with respect to interest rate through the user cost and through debt repayments taken into account in cash flow.

Finance for non-financial managers

Abstract: This title presents a complete introduction to financial reports - what the numbers mean, how to use them to improve your business. Financial reports speak their own language, one that many managers have trouble translating. "Finance for Non-Financial Managers" clears the confusion, helping you to understand the information contained in essential financial reports and then showing you how to use that understanding to make informed, intelligent decisions.Let this latest volume in "McGraw-Hill's Briefcase Books" series give you an immediate, working knowledge of: Basic Financial Reports - All about balance sheets, income statements, cash flow statements, and more; Cost Accounting - Methods to assess which products or services are most profitable to your firm, and why; and, Operational Planning and Budgeting - Ways to use financial knowledge to strengthen your company. Financial decisions impact virtually every area of your firm; as a manager, it's up to you to understand how and why. Let "Finance for Non-Financial Managers" show you how to understand the information found in everyday financial reports, and use that information to drive the success of both your firm and your career." Briefcase Books" are written specifically for today's busy manager. Each book features eye-catching icons, checklists, and sidebars to guide managers step-by-step through everyday workplace situations. Look for these innovative design features to help you navigate through each page: [Key Terms icon] clear definitions of key financial terms, concepts, and jargon; [Smart Managing icon] ways to use financial knowledge to improve decision-making; [Tricks of the Trade icon] how-to hints for "getting inside the numbers"; [Mistake proofing icon] advice for limiting finance miscues and mistakes; [Caution icon] warning signs for potential problems or disasters; [For Example icon] how other managers have confronted and solved financial questions; and, [Tools icon] specific methods for utilizing your newfound corporate finance skills.

Equilibrium Asset Prices under Imperfect Corporate Control

Abstract: Shareholders have imperfect control over the decisions of the management of a firm. We integrate a widely accepted version of the separation of owership and control — Jensen’s (1986) free cash flow theory — into a dynamic equilibrium model and study the effect of imperfect corporate control on asset prices and investment. We assume that firms are run by empire-building managers who prefer to invest all free cash flow rather than distributing it to shareholders. Shareholders are aware of this problem but it is costly for them to intervene to increase earnings payouts. Our corporate finance approach suggests that the aggregate free cash flow of the corporate sector is an important state variable in explaining asset prices and investment. We show that the business cycle variation in free cash flow helps to explain the cyclical behavior of interest rates and the yield curve. The stochastic variation in free cashflow sheds light on risk premia on corporate bonds and out-of-the-money put options. We also show that the financial friction causes cash-flow shocks to affect investment, and causes otherwise i.i.d. shocks to be transmitted from period to period. Unlike the existing macroeconomics literature on financial frictions, the shocks propagate through large firms and during booms.