Cost of capital and discount rates in cash flow valuations for resources projects

2018 ◽  
Vol 59 ◽  
pp. 525-531 ◽  
Author(s):  
Eric Lilford ◽  
Bryan Maybee ◽  
Dan Packey
Keyword(s):  
Cash Flow ◽  
Cost Of Capital ◽  
Discount Rates

scholarly journals New Models for Analyzing Changes in Company Value Based on Stochastic Discount Rates

2019 ◽  
Vol 23 (3) ◽  
pp. 35-48 ◽  
Author(s):  
P. E. Zhukov
Keyword(s):  
Cash Flow ◽  
Cost Of Capital ◽  
Weighted Average ◽  
Cash Flows ◽  
Free Cash Flow ◽  
Discount Rates ◽  
The Third ◽  
Company Value ◽  
New Models ◽  
Zero Growth

We propose new models for analyzing changes in the value of the company using stochastic discount rates. It is shown that for the majority of the companies under study, local changes in the rate of the company value growth (percentage changes to the previous level) are not explained by the corresponding changes neither in the weighted average cost of capital (WACC), nor in the cash flows. This fact, as well as the research results by J. Cochrane, who proved that discount rates volatility is the main contributor to price volatility, became initial prerequisites for building models based on stochastic discount rates. The work presents three models built on stochastic discount rates, where cash flows are assumed to be growing with a certain trend, and the factors affecting the price of the company are described by stochastic discount factors. These models are alternative in relation to the commonly used traditional cash flow discounting (DCF) models where the free cash flow is discounted through the WACC, or the free flow to capital at the opportunity cost of equity. The first model is used to analyze the dependence of the company value on investments. It uses free cash flow subject to zero growth. The second model uses net cash flow from operating activities plus interest, minus the minimum investment subject to zero growth. The third model uses net cash flow from operating activities plus interest adjusted to taxes. This model requires to estimate the rates of the company downsizing subject to zero investment. The third model is applicable for companies with volatile investments, where it is difficult to reliably estimate free cash flow in case of zero growth. The models are designed for analysis of the factors influencing the value of the company for value-based management. Another application of the models is the evaluation of investment value of the company and the answer to the question of its possible overestimated or underestimated value. The third way to apply this model is the empirical evaluation of the weighted average cost of capital applicable to the company’s investment projects, alternative to WACC, assessed by standard methods.

Profitability, risk and cash flow deficit for beginning cow–calf producers

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Carlos J.O. Trejo-Pech ◽  
Jared Bruhin ◽  
Christopher N. Boyer ◽  
S. Aaron Smith
Keyword(s):  
Cash Flow ◽  
Opportunity Cost ◽  
Net Present Value ◽  
Cost Of Capital ◽  
Herd Size ◽  
Discounted Cash Flow ◽  
Production Risk ◽  
Content Type ◽  
Market Values ◽  
Cow Calf

PurposeThe purpose of this study is to estimate the amount of cash flow deficit, if any, needed to maintain the operating costs and service debt of a startup cow–calf enterprise. The study compares long-term profitability and risk between starting small and building a herd to full carrying capacity or by starting at desired herd capacity.Design/methodology/approachA dynamic cattle growth model was developed to capture expanding and maintaining the desired herd size. Discounted cash flow (DCF) models over a 15-year period were calculated to estimate net present value (NPV), modified internal rate of return (MIRR) and cash flow deficit to keep the business operating and service debt. Simulation analyses were conducted considering price and production risk.FindingsStarting at the desired herd size was preferred, according to NPV/MIRR and cash flow deficit, but the differences were not substantial. Assuming the operation is liquidated at book values, there was a 36.3% probability of this enterprise having a zero or positive NPV. If the conservative terminal value assumption is relaxed up to feasible market values, the cow–calf enterprise is economically attractive at an estimated 2.4% opportunity cost of capital. However, the producer would experience a cash flow deficit during the first seven years, which was simulated to be $14,892 and $15,985 annual for both strategies.Originality/valueInnovative methods used in this study include varying the annual opportunity cost of capital as a function of financing decisions, stochastic prices by cattle type and stochastic weaning weights that are a function of a dynamic cattle model.

Dynamical Internal Cost of Capital Driven by Cash Flow Growth

2021 ◽  
Author(s):  
David Solo ◽  
Didier Sornette ◽  
Florian Ulmann
Keyword(s):  
Cash Flow ◽  
Cost Of Capital

VALUASI BISNIS BARU DAN OPTIMAL CAPITAL PERUSAHAAN JASA INDUSTRI (MAKLON) BAGI UMKM KERIPIK KEMASAN. (STUDI KASUS: PT KRISPINDO)

2020 ◽  
Vol 12 (2) ◽  
pp. 254-269
Author(s):  
Helena Dewi
Keyword(s):  
Cash Flow ◽  
Net Present Value ◽  
Cost Of Capital ◽  
Free Cash Flow ◽  
Rate Of Return ◽  
Internal Rate Of Return ◽  
Going Concern ◽  
Internal Rate ◽  
New Business ◽  
Equity Ratio

The increase of MSMEs in the food and beverage industry recently experiencing significant growth, especially during the Covid-19 pandemic. According to statistical data released by the Badan Pusat Statistik (BPS) in November 2020, the food industry dominated Micro and Small businesses in 2019 for 36.23%. The increasing number of MSME businesses in this sector becomes an opportunity for the processing services industry (contract manufacturer) to help MSMEs with all limitations. This study conducted a case study on PT. Krispindo as a company engaged in processing services (contract manufacturer) in the snack sector. This research aims to assess (valuation) new business proposed by PT. Krispindo in terms of optimal use of debt and equity for the company and also investment returns that can be given to investors. In addition, this research also aims to assist the company in making decisions for the following period project, decision to continue or discontinue the business. This study used optimal Cost of Capital (WACC) and Debt-to-Equity Ratio (DER) in setting optimal business capital. To measure investment return expectations for investors, the study used the company's Net Present Value (NPV), Free Cash Flow to Firm (FCFF) and Internal Rate of Return (IRR) approaches. To find out whether or not the business is further, this study uses Terminal Value Asset (TVA) and On Going Concern Value from the business obtained when the project ending. The results prove using debt in capital has more benefit for the company and the business can continue after the projection period ends.   Keywords: New Business Valuation (NPV), Debt-to-equity ratio (DER), Average Cost of Capital (WACC), Free Cash Flow to Firm (FCFF), Internal Rate of Return (IRR), Terminal Value Asset (TVA) and On Going Concern Value

After-Tax Discounting: A Research Edge

2020 ◽  
Vol 27 (2) ◽  
pp. 86
Author(s):  
Hongtao Guo
Keyword(s):  
Cash Flow ◽  
Discount Rate ◽  
Capital Markets ◽  
Research Note ◽  
Dynamic State ◽  
Discount Rates ◽  
Valuation Method ◽  
Flow Processes ◽  
Risk Neutral ◽  
Tax Status

This research note addresses after-tax discounting for pricing assets. Specifically, it analyzes the appropriate way to discount after-tax payoffs from assets that trade in capital markets in which both taxable and tax-free investors can buy and sell both taxable and tax-free instruments. The effect of the tax status of the investor and the tax status of the financing tool that an investor uses on price of an asset are discussed. Secondly, it derives the proper after-tax discount rate to use in the risk neutral valuation method for pricing assets that have state-contingent payments, typically structured in a lease based transaction. Dynamic state-contingent payoffs and cash flow processes are developed. Pre-tax discounted price, after-tax discounted payoffs are considered, then after-tax discount rate is derived. Included in this analysis of state-contingent discounting is the effect of depreciation expense, the only expense associated with the use of the asset, on after-tax discount rates

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