Taking the highway out: exiting the stock market to maximize results

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Joao Carlos Marques Silva ◽  
José Azevedo Pereira
Keyword(s):  
New York ◽  
Cash Flow ◽  
Corporate Strategy ◽  
Capital Budgeting ◽  
Cash Flows ◽  
Quarterly Journal ◽  
Free Cash Flow ◽  
Discounted Cash Flow ◽  
Content Type ◽  
Ability To Act

Theoretical basis The essence of discounted cash flow valuation is simple; the asset is worth the expected cash flows it will generate, discounted to the reference date for the valuation exercise (normally, the day of the calculation). A survey article was written in Parker (1968), where it was stated that the earliest interest rate tables (use to discount value to the present) dated back to 1340. Works from Boulding (1935) and Keynes (1936) derived the IRR (Internal Rate of Return) for an investment. Samuelson (1937) compared the IRR and NPV (Net Present Value) approaches, arguing that rational investors should maximize NPV and not IRR. The previously mentioned works and the publication of Joel Dean’s reference book (Dean, 1951) on capital budgeting set the basis for the widespread use of the discounted cash flow approach into all business areas, aided by developments in portfolio theory. Nowadays, probably the model with more widespread use is the FCFE/FCFF (Free Cash Flow to Equity and Free Cash Flow to Firm) model. For simplification purposes, we will focus on the FCFE model, which basically is the FCF model’s version for the potential dividends. The focus is to value the business based on its dividends (potential or real), and thus care must be taken in order not to double count cash flows (this matter was treated in this case) and to assess what use is given to that excess cash flow – if it is invested wisely, what returns will come of them, how it is accounted for, etc. (Damodaran, 2006). The bridge to the FCFF model is straightforward; the FCFF includes FCFE and added cash that is owed to debtholders. References: Parker, R.H. (1968). “Discounted Cash Flow in Historical Perspective”, Journal of Accounting Research, v6, pp58-71. Boulding, K.E. (1935). “The Theory of a Single Investment”, Quarterly Journal of Economics, v49, pp479-494. Keynes, J. M. (1936). “The General Theory of Employment”, Macmillan, London. Samuelson, P. (1937). “Some Aspects of the Pure Theory of Capital”, Quarterly Journal of Economics, v51, pp. 469–496. Dean, Joel. (1951). “Capital Budgeting”, Columbia University Press, New York. Damodaran, A. (2006). “Damodaran on Valuation”, Second Edition, John Wiley and Sons, New York. Research methodology All information is taken from public sources and with consented company interviews. Case overview/synopsis Opportunities for value creation may be found in awkward and difficult circumstances. Good strategic thinking and ability to act swiftly are usually crucial to be able to take advantage of such tough environments. Amidst a country-wide economic crisis and general disbelief, José de Mello Group (JMG) saw one of its main assets’ (Brisa Highways) market value tumble down to unforeseen figures and was forced to act on it. Brisa’s main partners were eager in overpowering JMG’s control of the company, and outside pressure from Deutsche Bank was rising, due to the use of Brisa’s shares as collateral. JMG would have to revise its strategy and see if Brisa was worth fighting for; the market implicit assessment about the company’s prospects was very penalizing, but JMG’s predictions on Brisa’s future performance indicated that this could be an investment opportunity. Would it be wise to bet against the market? Complexity academic level This study is excellent for finance and strategy courses, at both undergraduate and graduate levels. Company valuation and corporate strategy are required.

Getting the valuation formulas right when it comes to annuities

2022 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Denis Mike Becker
Keyword(s):  
Cash Flow ◽  
Direct Calculation ◽  
Cash Flows ◽  
Free Cash Flow ◽  
Discounted Cash Flow ◽  
Content Type ◽  
First Order ◽  
Tax Shield ◽  
Complete Set ◽  
Adjusted Present Value

PurposeThe purpose of this paper is to establish the flow-to-equity method, the free cash flow (FCF) method, the adjusted present value method and the relationships between these methods when the FCF appears as an annuity. More specifically, we depart from the two most widely used evaluation settings. The first setting is that of Modigliani and Miller who based their analysis on a stationary FCF. The second setting is that of Miles and Ezzell who worked with an FCF that represents an autoregressive possess of first order.Design/methodology/approachInspired by recent observations in the literature concerning cash flows, discount rates and values in discounted cash flow (DCF) methods, we mathematically derive DCF valuation formulas for annuities.FindingsThe following relationships are established: (a) the correct discount rate of the tax shield when the free cash flow takes the form of a first-order autoregressive annuity, (b) the direct valuation of the tax shield from the free cash flow for a first-order autoregressive annuity, (c) the correct translation from the required return on unlevered equity to the levered equity, when the free cash flow is a stationary annuity and (d) direct calculation of the unlevered and levered firm values and the value of the tax shield for a stationary annuity.Originality/valueUntil now the complete set of formulas for the valuation of stochastic annuities by different DCF methods has not been established in the literature. These formulas are developed here. These formulas are important for practitioners and academics when it comes to the valuation of cash flows of finite lifetime.

Corporate cash flow and dividends smoothing: a panel data analysis at Bursa Malaysia

2015 ◽  
Vol 13 (1) ◽  
pp. 2-19 ◽  
Author(s):  
Apedzan Emmanuel Kighir ◽  
Normah Haji Omar ◽  
Norhayati Mohamed
Keyword(s):  
Panel Data ◽  
Cash Flow ◽  
Panel Data Analysis ◽  
Generalized Method Of Moments ◽  
Cash Flows ◽  
Payout Policy ◽  
Free Cash Flow ◽  
Content Type ◽  
Financial Firms ◽  
The Impact

Purpose – The purpose of this paper is to contribute to the debate and find out the impact of cash flow on changes in dividend payout decisions among non-financial firms quoted at Bursa Malaysia as compared to earnings. There has been renewed debate in recent finance and accounting literature concerning the key determinants of changes in dividends payout policy decisions in some jurisdictions. The conclusion in some is that firms base their dividend decisions on cash flows rather than published earnings. Design/methodology/approach – The research made use of panel data from 1999 to 2012 at Bursa Malaysia, using generalized method of moments as the main method of analysis. Findings – The research finds that Malaysia non-financial firms consider current earnings more important than current cash flow while making dividends payout decisions, and prior year cash flows are considered more important in dividends decisions than prior year earnings. We also found support for Jensen (1986) in Malaysia on agency theory, that managers of firms pay dividends from free cash flow to reduce agency conflicts. Practical implications – The research concludes that Malaysian non-financial firms use current earnings and less of current cash flow in making changes in dividends policy. The policy implication is that current earnings are dividends smoothing agents, and the more they are considered in dividends payout decisions, the less of dividends smoothing. Social implications – If dividends smoothing is encouraged, it could lead to dividends-based earnings management. Originality/value – The research is our novel contribution of assisting investors and government in making informed decisions regarding dividends policy in Malaysia.

Financial sustainability in Italian farms: an analysis of the FADN sample

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Gabriele Dono ◽  
Rebecca Buttinelli ◽  
Raffaele Cortignani
Keyword(s):  
Rural Development ◽  
Cash Flow ◽  
Production Systems ◽  
Public Support ◽  
Cash Flows ◽  
Free Cash Flow ◽  
Financial Sustainability ◽  
Content Type ◽  
Random Effects Models ◽  
Financial Variables

PurposeThe paper examines the factors that influence the production of cash flows in a sample of Italian farm accountancy data network (FADN) farms to generate information useful for calibrating policies to support farmers' investments.Design/methodology/approachAn econometric analysis on the sample estimates the influence of structural, economic, commercial and financial variables on CAFFE, i.e. the cash flow that includes the payments to the farmer's resources and the free cash flow on equity (FCFE). The econometric problem of endogeneity is treated by adopting the Hausman test to choose between fixed and random effects models. The results for Italian agriculture and its types of farming (TFs) are examined based on the FCFE/capital depreciation ratio, where FCFE subtracts from CAFFE the opportunity cost payments to the farmer's resources. This ratio identifies TFs with problems of sustainability of the production system.FindingsThe results show that increasing the productive dimension, in particular the endowment of farmland and working capital, is still essential to stimulate the production of cash flows of Italian agriculture. Without this growth, increasing the depreciable capital base is ineffective. FCFE does not compensate for depreciation in several TFs, which in various cases could also improve by improving economic efficiency and commercial position.Research limitations/implicationsAssessing the factors that most influence cash flows can help to better calibrate rural development measures to the territories and farming types that most need public support. Our analysis procedure can be applied to all production systems equipped with farm accounting networks; however, the criteria for rewarding farmer resources and calculating the replacement value of agricultural capital need to be better discussed.Originality/valueThe specification of rural development policies rarely takes into account the financial sustainability conditions of farms, as well as the factors that determine them, in defining the support parameters and the selection criteria for funding. Our approach, based on the analysis of FADN data, considers these aspects and provides ideas for better calibrating public support for investments among agricultural territories, sectors and types of farms.

scholarly journals Terminal Value in SMEs: Testing the Multiple EV/EBITDA Approach

2019 ◽  
Vol 14 (1) ◽  
Author(s):  
Raül Vidal-Garcia ◽  
Javier Ribal
Keyword(s):  
Cash Flow ◽  
Food Industry ◽  
Empirical Distribution ◽  
Cash Flows ◽  
Free Cash Flow ◽  
Discounted Cash Flow ◽  
Public Companies ◽  
Bootstrap Techniques ◽  
Valuation Process

Abstract This study focuses on answering whether EV/EBITDA multiple of public companies in the food industry can be useful to obtain the Terminal Value (TV) in the valuation of unlisted small and medium-sized food companies. A case study into Spanish unlisted agribusinesses is designed for several samples and accounting years from 2010 to 2013. By means of a discounted cash flow (DCF) model combined with bootstrap techniques, the TV/EBITDA empirical distribution of the unlisted multiples is obtained for two different scenarios of free cash flow (FCF) growth, and then compared with the EV/EBITDA of the listed companies in the same industry. The results show that the stock market EV/EBITDA multiple may be used to determine the TV in the valuation process of unlisted small and medium-sized food companies that consistently obtain positive cash flows.

Misclassifying cash flows from operations: intentional or not?

2014 ◽  
Vol 22 (1) ◽  
pp. 18-32 ◽  
Author(s):  
Karen Lightstone ◽  
Karrilyn Wilcox ◽  
Louis Beaubien
Keyword(s):  
Cash Flow ◽  
Balance Sheet ◽  
Financial Analysts ◽  
Cash Flows ◽  
Free Cash Flow ◽  
Future Research ◽  
Content Type ◽  
Statement Of Cash Flows ◽  
Case Basis

Purpose – The purpose of this paper is to investigate the accuracy and informational quality of the cash from operations section of the cash flow statement. Design/methodology/approach – This paper empirically tested the accuracy of the cash from operations reported by Canadian non-financial companies. The authors studied 262 companies at three different time periods providing 786 firm observations. For each observation, the balance sheet was used to confirm the figures reported in the statement of cash flows. In addition, the authors investigated management's disclosure of the particular working capital items. Findings – The findings suggest that in recent years, companies are more likely to overstate their cash flow from operations, thereby presenting a better financial picture than is supported by the balance sheet accounts. This would suggest that the investing or financing section would be correspondingly understated. The presence of acquisitions reduces overstatements, which may be the result of more auditor presence. Research limitations/implications – This paper extends previous research from documented single, isolated instances of cash from operations being misstated to include a significant sample with more generalizable findings. The data are Canadian which may limit the generalizability to other countries. Future research should address the extent to which financial analysts rely on the reported cash from operations figure. Practical implications – This preliminary study may have implications for financial analysts and others relying on the free cash flow figure. Originality/value – This study expands on previous research which has taken place only on a case-by-case basis.

scholarly journals To Iterate Or Not To Iterate? Using The WACC In Equity Valuation

2011 ◽  
Vol 9 (11) ◽  
pp. 29 ◽  
Author(s):  
Patrick J. Larkin
Keyword(s):  
Cash Flow ◽  
Firm Value ◽  
Iterative Procedure ◽  
Capital Budgeting ◽  
Cash Flows ◽  
Debt Ratio ◽  
Discounted Cash Flow ◽  
Valuation Method ◽  
Equity Value ◽  
Current Value

The textbook discounted cash flow (DCF) valuation method involves estimating a target debt ratio for the firm, discounting firm cash flows at the WACC to estimate firm value, then subtracting the current value of debt to get equity value. This method gives the correct equity value in situations in which the firm will move toward the target debt ratio after the transaction is complete, such as takeovers and capital budgeting projects. The textbook method does not work well for estimating equity value in passive investments in which leverage is unlikely to change as a result of the potential transaction. Estimating equity value in passive investments when leverage is unlikely to change requires a simple iterative procedure to correct for circularity, which is demonstrated here. This situation sows confusion among students and practitioners. Finance scholars and textbook authors are aware of the situation but the author has never seen it clearly explained in prior textbooks or articles.

scholarly journals Company life cycle models and business valuation

2019 ◽  
Vol 93 (9/10) ◽  
pp. 285-296
Author(s):  
Michael Corbey ◽  
Frans de Roon ◽  
Stef Hinfelaar
Keyword(s):  
Life Cycle ◽  
Cash Flow ◽  
Growth Models ◽  
Forecast Accuracy ◽  
Cash Flows ◽  
Free Cash Flow ◽  
Life Cycle Thinking ◽  
Discounted Cash Flow ◽  
Business Valuation ◽  
Quality Life

Future free cash flow is a crucial element of most business valuation tools, such as the Discounted Cash Flow model, with the quality of the valuation depending heavily on its forecast accuracy. This paper explores the theory on business life cycle (and growth) models in an aim to improve that quality. Life cycle and growth models have been studied in the management and organization literature for decades, but the relevant aspects from a business valuation perspective remain unclear. Reviewing the existing literature, we argue that the five-stage Hanks model (Start-up, Growth, Maturity, Diversification, and Decline) is applicable for valuation purposes. We further argue that life cycle thinking provides useful insights for making grounded assumptions in predicting the future free cash flows and residual value of a company. This paper presents practical valuation approaches and insights for each of the five stages of the Hanks model.

Refinement of the FCF motive for stock repurchases

2019 ◽  
Vol 28 (2) ◽  
pp. 213-228
Author(s):  
Nan Liu
Keyword(s):  
Financial Crisis ◽  
Cash Flow ◽  
Positive Association ◽  
Cash Flows ◽  
Free Cash Flow ◽  
Stock Repurchases ◽  
Tobit Regression ◽  
Content Type ◽  
Crisis Period ◽  
Increased Risk

Purpose The purpose of this paper is to investigate factors that influence the free cash flow (FCF) motive for stock repurchases. Specifically, it examines whether the positive association between FCF and open-market repurchases is partially driven by abnormal cash flows, and whether external analyst monitor and financial crisis influence the association. Design/methodology/approach The study employs a tobit regression model to test the hypotheses. Findings First, the results suggest that the positive association between FCF and stock repurchases is partially driven by abnormal cash flows. Second, the association between pre-managed FCF and stock repurchases is strengthened as more analyst following the firms. Third, firms repurchase less when they report more negative abnormal cash flows, and that tendency is more pronounced during the 2008 financial crisis period. Further analysis shows that during the crisis period, the effect of negative abnormal cash flows on operating performance gets stronger. Originality/value The study makes several contributions to the literature. This paper is the first to show that managers use abnormal cash flows to fulfill the share buy-backs. In addition, it shows that analysts provide effective external monitoring by strengthening the association between pre-managed FCF and repurchases. Furthermore, it finds that firms adjust their strategy in times of financial crisis period in response to the increased risk. Finally, it contributes to the earnings management literature by showing the differential effects of accruals management and cash flow management on earnings performance.

Financial risks in Rwandan smallholder broiler production

2019 ◽  
Vol 9 (5) ◽  
pp. 569-583
Author(s):  
Bartholemew Kenner ◽  
Dayton M. Lambert ◽  
Carlos Omar Trejo-Pech ◽  
Jada M. Thompson ◽  
Thomas Gill
Keyword(s):  
Cash Flow ◽  
Market Price ◽  
Spot Market ◽  
Cash Flows ◽  
Technical Support ◽  
Discounted Cash Flow ◽  
Market Prices ◽  
Content Type ◽  
Operating Cash Flows ◽  
Broiler Production

Purpose The purpose of this paper is to determine the stochastic net present value (NPV) of a model smallholder poultry operation in Rwanda under production and market uncertainty. Design/methodology/approach A discounted cash flow calculator was used to determine the NPV of operator investments and operating cash flows, including time, materials and capital. Broiler production data, market prices and variable input costs were collected from 125 smallholder operations in the Musanze District, Rwanda. These data were combined with a historical price index tracking the inflation rate of Rwanda’s currency. Policies including overstocking, technical support repayment scheduling, selling broilers at a spot market price, using marketing contracts and selling poultry manure were compared using non-parametric paired comparisons and stochastic dominance. Findings Risk-neutral and risk-averse producers would prefer overstocking, delaying repayment of technical support services and selling manure to status quo operational policy. No differences were observed between the option to sell birds at spot market prices or through contracts. Research limitations/implications This analysis demonstrates how individual managerial or an intervention in smallholder broiler production affects financial performance. Practical implications To mitigate risk associated with this novel enterprise, producers should consider overstocking birds. If local markets for manure were developed, the risks faced by new or beginning poultry operators could be mitigated. Originality/value A stochastic, discounted cash flow model calculator was used to determine the NPV and discounted payback period of operator investments and operating cash flows, including time, materials and capital.

UrsaNav: the power of the bear

2019 ◽  
Vol 15 (6) ◽  
pp. 575-606
Author(s):  
Susan White ◽  
Karen Hallows
Keyword(s):  
Flow Analysis ◽  
Capital Budgeting ◽  
Cash Flows ◽  
Discounted Cash Flow ◽  
Content Type ◽  
Consulting Services ◽  
Academic Level ◽  
Basic Capital ◽  
Current Events ◽  
A Company

Theoretical basis Students will need to know basic capital budgeting techniques to value UrsaNav and its divisions. Students must determine which cash flows are relevant and determine an appropriate return on investment. Some of the issues that need to be addressed include: how to handle taxes in a discounted cash flow analysis when valuing an S Corp. where incentives depend on current (known) tax provisions and future (unknown) tax provisions; how to use comparable multiples to develop a cost of capital for a DCF valuation; and how to value a firm using comparable transactions. Research methodology Case information was obtained through interviews with the owner, Charles Schue. In addition, the authors researched industry and comparable company data, along with current events relating to government consulting. Case overview/synopsis UrsaNav is a US-based, international provider of advanced engineering and information management consulting services in the naval navigation industry. After about a decade of operating and growing, the firm had become successfully diversified; however, it had also grown too large to manage effectively. Thus, the company was spun-off into three separate segments: Tagence, Geodesicx and UrsaNav. These segments went “back to the basics,” and focused more on serving customers, with each having a more defined company focus. Is this a move that creates or destroys value? How could it create value for the firms’ founders? Complexity academic level This case is intended for an advanced undergraduate or an MBA corporate finance class or an entrepreneurship elective. Students interested in analyzing whether or not decision makers within a company would want to spin-off divisions, or merge with another company, or divest a company would find this case appealing. Other students who just want to analyze whether the company has grown too much would be good candidates to do this case.

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