Risk-Factor Disclosure and Asset Prices

2017 ◽  
Vol 93 (2) ◽  
pp. 191-208 ◽  
Author(s):  
Mirko S. Heinle ◽  
Kevin C. Smith ◽  
Robert E. Verrecchia
Keyword(s):  
Risk Factor ◽  
Cash Flow ◽  
Cost Of Capital ◽  
Common Knowledge ◽  
Flow Distribution ◽  
Share Price ◽  
Higher Moments ◽  
Price Response ◽  
Capm Beta ◽  
Systematic Risk Factors

ABSTRACT While researchers and practitioners alike estimate firms' exposures to systematic risk factors, the disclosure literature typically assumes that exposures are common knowledge. We develop a model where the firm's exposure to a factor is unknown, and analyze the effects of factor-exposure uncertainty on share price and the effects of disclosure about the exposure. We find that: (1) factor-exposure uncertainty introduces skewness and excess kurtosis in the cash flow distribution relative to the commonly used normal distribution; (2) risk-factor disclosure affects all moments of that distribution; and (3) the pricing of higher moments affects the price response of disclosure and the incentives to disclose. For example, factor-exposure uncertainty may actually increase price when the uncertainty implies positive skewness in the cash flow distribution. Hence, a reduction in uncertainty through disclosure may increase cost of capital. We also extend our model to multiple firms and show that factor-exposure uncertainty manifests as uncertainty about a firm's CAPM beta. JEL Classifications: G12; M41.

scholarly journals Macroeconomic Risk Factor in Fuzzy Present Value of Highway Development

2018 ◽  
Vol 7 (4.33) ◽  
pp. 71
Author(s):  
Siti Salihah Shaffie ◽  
Saiful Hafizah Jaaman ◽  
Daud Mohamad
Keyword(s):  
Economic Growth ◽  
Risk Assessment ◽  
Risk Factor ◽  
Cash Flow ◽  
Capital Investment ◽  
Accurate Estimation ◽  
Present Value ◽  
Macroeconomic Risk ◽  
Macroeconomic Factor

Highway developments are the backbone for the society and economic growth. It is part of the capital investment in infrastructure developments that require high spending, long term commitment and prognosticated with numbers of risks. This is because the investment is associated with uncertainty and vagueness due to long term duration of construction and operation of the project. Hence, the valuation of the investment requires accommodated model to present more accurate estimation of the project. This study proposed to evaluate fuzzy present value of a highway project with anticipated risk assessment in its valuation using fuzzy present value. The risk assessment is part of the estimation of fuzzy cash flow to represent better present value of the project. The results show an estimated value comprise with risk assessment of macroeconomic factor to portray better estimation that can assist decision maker to make decision towards the project.   

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

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 Constant Leverage And Constant Cost Of Capital: A Common Knowledge Half-Truth

2008 ◽  
Vol 24 (107) ◽  
pp. 13-33 ◽  
Author(s):  
Ignacio Vélez–Pareja ◽  
Rauf Ibragimov ◽  
Joseph Tham
Keyword(s):  
Cost Of Capital ◽  
Common Knowledge ◽  
Constant Cost

Cash flow uncertainty and IPO underpricing: evidence from income guarantee in Thai REITs

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Kanis Saengchote ◽  
Chittisa Charoenpanich
Keyword(s):  
Initial Public Offerings ◽  
Cash Flow ◽  
Simultaneous Equations ◽  
Least Square ◽  
Ipo Underpricing ◽  
Content Type ◽  
Useful Signal ◽  
Ex Ante ◽  
Capm Beta ◽  
The Relationship

PurposeThe purpose of this article is to investigate the relationship between cash flow uncertainty and the underpricing of real estate investment trust (REIT) initial public offerings (IPOs) using hand-collected data on income guarantee in Thailand from January 2005 to December 2019.Design/methodology/approachThis article uses linear regression to determine the relationship between underpricing (initial return) and proxy for cash flow uncertainty (income guarantee), controlling for other factors. Because issuers can use several actions to signal their quality under asymmetric information, the joint decisions are analyzed as simultaneous equations and estimated using three-stage least square (3SLS) to address potential endogeneity concern.FindingsThis article finds that underpricing, on average, is negatively related to income guarantee, which is a proxy for ex ante cash flow uncertainty. The relationship is economically and statistically significant and robust to simultaneous equations estimation. Further investigation shows that REITs with income guarantee tend to have lower systematic risk (measured by CAPM beta) and returns, making the nature of some REITs more debt-like than equity-like.Practical implicationsFor issuers, the result suggests that offering income guarantee (which is more costly for assets with lower quality) can be a useful signal of asset quality to investors and reduce IPO discount. For institutional and retail investors, the results are informative about the risk-return tradeoffs in REIT IPO investment opportunities. Income guarantees makes REIT exposure more fix income-like, so there is a need to consider the credibility of the guarantor as well.Originality/valueThis article is the first to use income guarantee as an ex ante measure of cash flow uncertainty and explicitly investigates its linkage to IPO underpricing. This aspect of uncertainty and IPO underpricing remains little-studied in the academic literature. It also contributes to the growing literature of REIT IPOs in Asia.

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