Cost of capital and asset characteristic value

2021 ◽  
pp. 2150007
Author(s):  
Bill Y. Shen
Keyword(s):  
Stock Price ◽  
Cost Of Capital ◽  
Investment Decision ◽  
Fair Value ◽  
Secondary Market ◽  
Credit Spread ◽  
Structure Model ◽  
Characteristic Value ◽  
Option Theory ◽  
The Cost

We propose a possible alternative to WACC as cost of capital for a business investment decision through option theory. The cost of capital in this new definition becomes forward-looking and easy to compute with traded market information as inputs. More importantly, it is a fair value- based approach and does not depend on investors’ own expectation. An important parameter “asset characteristic value” is identified and its role is further illustrated by using Merton’s capital structure model. Asset characteristic value can be calibrated by using stock price or credit spread observed from a secondary market.

Usec Inc.

2017 ◽  
pp. 1-11
Author(s):  
Kenneth M. Eades ◽  
Ben Mackovjak ◽  
Lucas Doe
Keyword(s):  
Stock Price ◽  
Capital Investment ◽  
Net Present Value ◽  
Cost Of Capital ◽  
Investment Decision ◽  
Weighted Average ◽  
Cash Flows ◽  
Primary Objective ◽  
Discounted Cash Flow ◽  
Important Input

This case is designed to present students with the challenges of formulating a discounted-cash-flow (DCF) analysis for a strategically important capital-investment decision. Analytically, the problem is representative of most corporate investment decisions, but it is particularly interesting because of the massive size of the American Centrifuge Project and the potential of the project to significantly affect the stock price. Students must determine the relevant cash flows, paying close attention to the treatment of input costs, selling prices, timing of investment outlays, depreciation, and inflation. An important input is the appropriate cost of uranium, which some students argue should be included at book value, while others argue that market value should be used. Although the primary objective of the case is to focus on the estimation of cash flows, students are provided with a straightforward set of inputs to estimate USEC's weighted average cost of capital. The case is designed for students who are learning, or need a refresher on, DCF analysis. Because of the basic issues covered, the case works well with undergraduate, MBA, and executive-education audiences. The case also affords the opportunity to explore a variety of issues related to capital-investment analysis, including relevant costs, incremental analysis, cost of capital, and sensitivity analysis. The case is an excellent example of the value of a firm as the value of assets in place plus the net present value of future growth opportunities.

scholarly journals Financial Performance of Indian Pharmaceutical Companies: Analysis of Leverage and Cost of Capital

2020 ◽  
Vol 1 (1) ◽  
pp. 13-22
Author(s):  
Ahmed Mahdi Abdulkareem
Keyword(s):  
Cost Of Capital ◽  
Investment Decision ◽  
Financial Statements ◽  
Annual Reports ◽  
Pharmaceutical Companies ◽  
Financial Leverage ◽  
Significant Difference ◽  
The Cost ◽  
Operating Leverage ◽  
Practical Implications

Purpose: The main aim of the study is to examine the performance of selected pharmaceutical companies in India based on the Degree Of Operating Leverage, Degree Of Financial Leverage, Degree Of Combined Leverage, and Cost Of Capital. Approach/Methodology/Design: Five pharmaceutical companies were randomly selected, and the annual reports and financial statements of these companies were analyzed. The analysis methods involved Degree Of Operating Leverage, Degree Of Financial Leverage, Degree Of Combined Leverage, and Cost Of Capital. ANOVA test was also employed to test hypotheses. The study is made for five years from 2013-14 to 2017-18. Findings: The results of the study reveal that there is a significant difference in the (means) variables in terms of leverage (operating, finance, and combined) and cost of capital. All leverages are different to each other and the cost of capital. The analysis reveals that Sun Pharma performed well during the study period, whereas Lupin underperformed in all aspects. Practical Implications: The leverage and cost of capital are very important components for deciding whether to invest or not in pharmaceutical companies. The present study highlights the financial performances and growth of the selected pharmaceutical companies. Originality/value: The results of the paper give certain indicators about the performance of the selected companies. These indicators can be used to inform an investment decision.

scholarly journals Does Mispricing Affect Investment And Capital Structure Of Indonesian Firms?

2011 ◽  
Vol 4 (2) ◽  
Author(s):  
Risal Rinofah ◽  
Irwan Trinugroho
Keyword(s):  
Capital Structure ◽  
Stock Price ◽  
Cost Of Capital ◽  
Financial Constraint ◽  
Market Sentiment ◽  
Investment Level ◽  
Equity Ratio ◽  
Fundamental Value ◽  
High Level ◽  
The Cost

Stock price movement is not entirely a reflection of its fundamental value because of there are non-fundamental factors such as market sentiment (Keynes, 1936), behavioral biases of investors (Lakonishok et al., 1994), systematic errors when assessing stock (Stein, 1996), asymmetric information (Tobin, 1969) causing the value of stock deviate from its fundamental value (misprice). This condition can affect corporate investment decisions because managers can take advantage of overvalued stock condition as a source of investment funding because the cost of capital becomes cheaper. Conversely, firms avoid selling stocks at undervalued due to high cost of capital. Therefore, the objectives of this research is to examine the effect of mispricing to firms investment behavior and to firms capital structure. We also test the role of the level of financial constraint in the relationship between mispricing and investment.Using panel data regression with data observation for five years, we find that mispricing have positif impact to firms investment level. However, this effect is not diverse whether on a group of firms which have a high level of financial constraint (financially constraint) or those which have a low level of financial constraint (less constraint). Moreover, this research also find that the mispricing can also influence firms in choosing sources of funding which can be seen on their debt to equity ratio (D/E). To check the accuracy of examination, we employ some robustness test and use several control variables. These results are consistent with and can be explained using market timing and catering hypotesis. 

scholarly journals The Impact of Stock Price Crash Risk on the Cost of Capital: Empirical Study from China

2021 ◽  
Vol 3 (2) ◽  
pp. 88-97
Author(s):  
Muhammad Hamza Khan ◽  
Muhammad Rizwan
Keyword(s):  
Information Disclosure ◽  
Stock Price ◽  
Cost Of Capital ◽  
Stock Exchange ◽  
Cost Of Debt ◽  
Crash Risk ◽  
Cost Of Equity ◽  
Coefficient Of Skewness ◽  
The Cost ◽  
The Impact

This study analysed the effect of Sock Price Crash Risk (SPCR) on the cost of capital in Chinese listed firms in the Shenzhen stock exchange and the shanghai Stock Exchange. A sample of 290 firms based on the highest value of assets of each firm was used. The cost of capital consists of two factors; the cost of equity (COE) and the cost of debt (COD). The SPCR is measured by using two statistics, one is NCSKEW means the negative coefficient of skewness of the firm-specific weekly returns and the second is DUVOL that means Down to-Up Volatility used to measure the crash likelihood weekly return of firm-specific and used the Modified PEG ratio model of Eston approach to measuring the cost of equity. We used panel data to run the regression model analyses. SPCR was found to have a significantly positive relationship with the cost of equity and cost of debt. Also, the sample was divided into the State-Owned enterprise (SOEs) and Non-State-Owned enterprises (NSOEs) for comparison. The results show that the impact of SPCR on the COE and COD is stronger in SOEs than NSOEs. The regulators need to improve and strengthen the development of laws and regulations related to company information disclosure, to reduce the cost of capital of listed companies and improve the efficiency of financing the Chinese capital market. Companies need to work together to strengthen internal controls, create a good disclosure environment, and prevent the SPCR.

scholarly journals Security Fungibility and the Cost of Capital: Evidence from Global Bonds

2005 ◽  
Vol 40 (4) ◽  
pp. 849-872 ◽  
Author(s):  
Darius P. Miller ◽  
John J. Puthenpurackal
Keyword(s):  
Stock Price ◽  
Cost Of Capital ◽  
Shareholder Wealth ◽  
Cost Of Debt ◽  
Debt Capital ◽  
Time Period ◽  
Stock Price Reaction ◽  
Potential Benefits ◽  
The Cost ◽  
The Impact

AbstractThis paper examines the potential benefits of security fungibility by conducting the first comprehensive analysis of global bonds. Unlike other debt securities, global bonds' fungibility allows them to be placed simultaneously in bond markets around the world; they trade, clear, and settle efficiently within as well as across markets. We test the impact of issuing these securities on firms' cost of capital, issuing costs, liquidity, and shareholder wealth. Using a sample of 230 global bond issues by 94 companies from the U.S. and abroad over the period 1996–2003, we find that firms lower their cost of (debt) capital by issuing these fungible securities. We also document that the stock price reaction to the announcement of global bond issuance is positive and significant, while comparable domestic and eurobond issues over the same time period are associated with insignificant changes in shareholder wealth.

scholarly journals Analisis Kelayakan Pengembangan Proyek Apartemen Citralake Suites - Citra Garden City

2020 ◽  
Vol 4 (2) ◽  
pp. 16
Author(s):  
Noor Achyar Sulthoni ◽  
Anas Lutfi
Keyword(s):  
Cost Of Capital ◽  
Investment Decision ◽  
Weighted Average ◽  
Internal Rate Of Return ◽  
Calculation Methods ◽  
Present Value ◽  
Value Analysis ◽  
Alternative Funding ◽  
Cash Inflow ◽  
The Cost

The population density in the capital has increased from year to years, this situation used by PT CD as a business tool in the property sector. A kind of research is needed to find out whether the development of this land is profitable or not, by conducting a Business Feasibility Analysis. Investment decision analysis is done by using 3 (three) main calculation methods. From the results of research conducted by the author, it is obtained as follows in :In the payback period, sales are up to 2018, reaching 60%, so this project is feasible to be acceptedNet Present Value Analysis, From the results of calculations, NPV cash inflow is still far greater than the NPV cash outflow means that according to the NPV assessment that this project is considered very feasible to be carried outThe Internal Rate of Return (IRR) is a feasible project because the IRR is a normal and optimistic alternative. greater than the Weighted average cost of capital (WACC)Based on the results of the analysis and calculations carried out by the author in relation to project, the general investment investment is considered very feasible and beneficial not only to the developer but also consumers who buy apartment units on the project. Paying attention to what has been analyzed and discussed, the author's suggestion is to re-check cashflow by considering finding alternative funding with an improved loan. so that the cost of capital is small and profits increase.

Does the Cost Stickiness Affect the Stock Price Crash?

2020 ◽  
Vol 20 (2) ◽  
pp. 1-26
Author(s):  
YeungEun Hong ◽  
SooJin Kim ◽  
JongKook Park
Keyword(s):  
Stock Price ◽  
The Cost ◽  
Cost Stickiness

Pengaruh Reputasi Underwriter, Umur Perusahaan, dan Persentase Penawaran Saham 53 kepada Publik terhadap Underpricing

2016 ◽  
Vol 8 (1) ◽  
pp. 53-74
Author(s):  
Maria Jeanne ◽  
Chermian Eforis
Keyword(s):  
Initial Public Offering ◽  
Stock Price ◽  
Stock Exchange ◽  
Secondary Data ◽  
Secondary Market ◽  
Financial Statement ◽  
Data Set ◽  
Multiple Regression Method ◽  
Underwriter Reputation ◽  
Public Offering

The objective of this research is to obtain empirical evidence about the effect of underwriter reputation, company age, and the percentage of share’s offering to public toward underpricing. Underpricing is a phenomenon in which the current stock price initial public offering (IPO) was lower than the closing price of shares in the secondary market during the first day. Sample in this research was selected by using purposive sampling method and the secondary data used in this research was analyzed by using multiple regression method. The samples in this research were 72 companies conducting initial public offering (IPO) at the Indonesian Stock Exchange in the period January 2010 - December 2014; perform initial offering of shares; suffered underpricing; has a complete data set forth in the company's prospectus, IDX monthly statistics, financial statement and stock price site (e-bursa); and use Rupiah currency. Results of this research were (1) underwriter reputation significantly effect on underpricing; (2) company age do not effect on underpricing; and (3) the percentage of share’s offering to public do not effect on undepricing. Keywords: company age, the percentage of share’s offering to public, underpricing, underwriter reputation.

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