Showing papers on "Financial risk published in 1979"

The Theoretical Relationship Between Systematic Risk and Financial (Accounting) Variables

Abstract: CONSIDERABLE EMPIRICAL RESEARCH HAS been directed to the relationship between financial and accounting variables and market based measures of risk.1 The results of this research indicate that some financial (accounting) variables are highly correlated with a market based measure of risk (beta) and are useful in the prediction of future risk. However, there has been relatively little research into the theoretical relationship between financial variables and market determined risk. Hamada [13, 14] has researched the relationship between portfolio analysis and corporate finance. More specifically, he has shown that the systematic risk of a firm's common stock should be positively correlated with the firm's leverage. The analytical approach used by Hamada will be discussed more thoroughly below. The approach used in this paper to develop a relationship between systematic risk and leverage draws on the earlier work of Hamada. In the later paper, he adopted a different approach to arrive at a similar conclusion. Lev [19] has shown, using the approach adopted by Hamada [14], that a firm's operating leverage (the ratio of fixed to variable operating costs) is a variable affecting systematic risk. Pettit and Westerfield [30] assumed a discounted cash flow valuation model and separated the individual security return into cash flow and capitalization rate components. They proceeded to analytically develop a two factor model of beta.2 Although the approach which they used is promising, the model which they developed was not readily testable. The purpose of this paper is to provide a theoretical basis for empirical research into the relationship between systematic risk and financial (accounting) variables. Section II develops the assumptions and relationships of the capital asset pricing model. Systematic risk is defined as the /B parameter from this model. In the following sections we will show that, given the assumptions, there is a theoretical relationship between a firm's systematic risk and the firm's leverage and accounting beta. Also, we show that systematic risk is not theoretically related (directly) to the earnings variability, dividends, size or growth of a firm.

Basic Financial Management

Abstract: 1. An Introduction to Financial Management.Appendix: Methods of Depreciation. 2. The Role of Financial Markets and Interest Rates in Financial Management. 3. Evaluating a Firms Financial Performance and Measuring Cash Flow. 4. Financial Forecasting, Planning, and Budgeting. 5. The Time Value of Money. 6. Risk and Rates of Return.Appendix: Measuring the Required Rate of Return: The Arbitrage Pricing Model. 7. Bond Valuation. 8. Stock Valuation.Appendix: The Relationship Between Value and Earnings. 9. Capital-Budgeting Decision Criteria. 10. Cash Flows and Other Topics in Capital Budgeting. 11. Capital Budgeting and Risk Analysis. 12. Cost of Capital. 13. Analysis and Impact of Leverage. 14. Planning the Firms Financing Mix. 15. Dividend Policy and Internal Financing. 16. Working-Capital Management and Short-Term Financing. 17. Cash and Marketable Securities Management.Appendix: Cash-Management Models: Split Between Cash and Near Cash. 18. Accounts Receivable, Inventory, and Total Quality Management. 19. Term Loans and Leases. 20. The Use of Futures, Options, and Currency Swaps to Reduce Risk.Appendix: Convertible Securities and Warrants. 21. Corporate Restructuring: Combinations and Divestitures. 22. International Business Finance. Appendix A: Using a Calculator. Appendix B: Compound Sum of $1. Appendix C: Present Value of $1. Appendix D: Sum of an Annuity of $1 for n Periods. Appendix E: Present Value of an Annuity of $1 for n Periods. Appendix F: Solutions for Selected End-of-Chapter Problems. Glossary. Organization Index. Subject Index.

Guide to Financial Analysis

Abstract: Financial management the tools of financial analysis financial forecasting planning and control valuation capital budgeting the measurement of risk in investment proposals estimating the required rate of return on investment proposals the management of cash and marketable securities the management of receivables and inventories credit policy decisions financing the needs of funds determining the financing mix dividend policy.

Leasing, borrowing and financial risk

Abstract: Study Center in Managerial Working Paper Economics & Finance On Leasing, Borrowing and Financial Risk Haim Levy and Marshall August 1979 Sarnat * Professor of Finance, The Hebrew University, Jerusalem; and Visiting Professor, University of Pennsylvania ** Professor of Finance, The Hebrew University, Jersualem; and Visiting Professor, University of California at Los Angeles. The authors acknowledge the helpful comments of T. Ophir and Z. Lerman.

The Risk Structure of Interest Rates and the Penn- Central Crisis

Abstract: IN RECENT YEARS MUCH debate has arisen over the effect that the defaults of major corporations or municipalities have had upon their respective financial markets. Such cases involve the June, 1970 default of the Penn-Central Corporation and the New York City Fiscal Crisis of 1975. Some contend that efficient markets prevent major financial crisis such as the Penn-Central default from having more than a momentary impact on the strucutre of interest rates, while others argue that interest rates should increase and then return more slowly to normal levels [6, 9, 12, 14]. This study examines the Penn-Central default, the largest single bankruptcy filed in our nation's history and the first default of investment grade bonds (bonds rated BAA or higher) in the post war period. More specifically, it examines the hypothesis that the Penn-Central default by itself caused a re-evaluation of investor risk-perceptions. In a study especially relevant to this question, Jaffee [14] concluded that the Penn-Central default by itself led to a significant increase in the risk structure of interest rates in the corporate bond market, lasting for nearly three years.If these results are correct, there was a major re-evaluation of bond prices by investors. These findings tend to support concerns expressed by govern-ment officials that such "crises" cause a "broad psychological impact" on financial markets resulting in higher than normal new issue borrowing costs. We address this debate by developing a model which explains the cyclical variation in interest rate differentials (hereafter risk spreads) in the corporate bond market over the business cycle, and then testing empirically whether the Penn-Central default affected bond risk spreads. The paper is organized as follows. Section I presents some background information on the risk structure of interest rates and reasons why risk spreads may vary systematically with the level of economic activity. In Section II, aggregate risk spread averages are employed in time series analysis to determine the extent to which variations between Moody's risk categories can be explained by simple cyclical measures and risk spread determinants. In Section III, the model is subjected to statistical pooling tests-both for intercept and slope coefficient changes-to determine whether the Penn-Central default by itself impacted upon the risk spread averages. The results of this testing are then compared with the

Controlling Risk in Capital Budgeting: A Practical Use of Utility Theory for Measurement and Control of Petroleum Exploration Risk

Abstract: (1979) Controlling Risk in Capital Budgeting: A Practical Use of Utility Theory for Measurement and Control of Petroleum Exploration Risk The Engineering Economist: Vol 25, No 3, pp 161-186

Equivalent risk classes: a multidimensional examination

Abstract: It is commonplace within the confines of finance literature to explain variations in the firm's residual income stream via the dichotomy of business risk and financial risk. On an ex-post basis the business risk of the enterprise is a direct result of the firm's investment decision and is, thereby, embodied in its asset structure. It follows that the company's cost structure, product demand characteristics, intra-industry competi? tive position, and managerial talent all affect its business risk posture. Financial risk, on the other hand, is a direct result of the firm's financing de? cision. It is more easily controlled by management than business risk and arises primarily from the use of securities bearing a fixed rate of return in the corporate finan? cial structure. As the degree of trading on the equity is increased, the earnings flow available to the common stockholders exhibits increased variability. Additionally, the owners endure an increased chance of the risk of ruin. This paper deals with the fundamental concept of business risk classes. We seriously question the proposition that industry groupings of firms suffice as effective sur? rogates for equivalent risk classes. The position taken here is that business risk is in reality multidimensional. Attempts to utilize univariate definitions, although convenient (e.g., the standard error about a trend equation for operating income), can be vastly improved upon with regard to effective use in financial research and ultimate policy formulation. The objectives of this work are to formulate a multivariate definition of business risk and present a procedure for its implementation. Section II discusses the importance of the risk class concept from theoretical and practical standpoints. In Section III the relation of this study to earlier efforts on the same topic is noted. Section IV contains a description of the underlying determinants

A Practical Approach to the Lease Versus Purchase Problem

Abstract: The lease versus purchase decision has intrigued and perplexed both the academician and the practitioner for many years. The enigmatic nature of this problem stems largely from the fact that lease‐purchase is a financial hybrid containing both financing and investment elements. The decision is unique in that the amount of financing provided by the lease alternative is not a matter of managerial discretion. Leasing commits the firm to what is, in effect, 100 per cent nonequity financing of the asset's acquisition. A purchase decision, on the other hand, allows the firm some flexibility in determining the optimal debt‐equity financing mix. This necessarily raises the question of how a firm should deal with the issue of financial risk differences between the alternatives.