Getting the valuation formulas right when it comes to annuities

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.

Profitabilitas menjadi pemediasi untuk variabel yang mempengaruhi struktur modal (Studi pada Bank Umum Syariah di Indonesia periode 2016-2020)

The purpose of this study is to find out and analyze whether there is an Influence of Liquidity, Growth Opportunity, Asset Structure, and Non Debt Tax Shield on Capital Structure with Profitability as an Intervening Variable in Islamic Commercial Banks Registered at OJK 2016-2020 ". This research is a quantitative research using data sources derived from secondary data, namely the annual report. The sampling technique used in this research is purposive sampling technique. Of the 14 Islamic commercial banks registered with the OJK, only 11 are in accordance with the sample criteria in this study. This study uses the Eviews 9 application as a tool for data processing. The analytical methods used in this research are stationarity test, panel data regression model test, classical assumption test, regression test, and path analysis test. The results obtained in this study are liquidity has a significant negative effect on capital structure. Growth opportunity and asset structure have a significant positive effect on capital structure. Meanwhile, the non-debt tax shield and profitability variables have no significant positive effect on capital structure. Liquidity has no significant negative effect on profitability, growth opportunity has no significant positive effect on profitability. Asset structure has a significant positive effect on profitability, while non-debt tax shield has a significant negative effect on capital structure. From the results of the path analysis conducted in this study, profitability was not able to mediate the variables of liquidity, growth opportunity, and non-debt tax shield on capital structure, but for the asset structure variable profitability was able to mediate the influence of asset structure on capital structure.

Depreciation Capital as a Source of Financing of Mining Companies Activities

The issue discussed in the paper is highly relevant and topical in economic practice because of changes in the recognition of certain assets and their depreciation. The author’s research established that depreciation write-off in financial terms constitute capital comprising two components: depreciation and the tax shield effect. The non-tax shield is more important relative to other tax shields because the vast majority of entities in the raw materials industry own assets which are depreciated for the purposes of balance sheet accounting and tax accounting. As a cost depreciation, on the one hand, reduces the financial result and on the other, generates additional operating cash flows. Depreciable assets account for a large portion of coal companies’ assets. In addition, due to the implementation of IFRS 16 on leasing their share increased as did the amount of depreciation. Hence, its share in operating cash flows in Polish coal companies is slightly higher than in global companies. An overwhelming part of the additional depreciation arising from the inclusion in the assets reported in the balance sheet of assets used based on contracts of lease, lending or rental does not reduce the tax basis and does not constitute a tax shield. Consequently, it creates a disparity between the gross profit/loss and taxable income, thereby increasing the effective tax rate. An increase in the depreciation level in coal companies facilitates maintenance of liquidity and provides financing for investment projects and improves debt servicing, especially in times of declining financial result when coal prices are low.

DETERMINANTS OF THE CAPITAL STRUCTURE OF EUROPEAN FIRMS: THE MODERATING ROLE OF EFSF/ESM FINANCIAL ASSISTANCE PROGRAMS

The present study has investigated the moderating effect of the European Financial Stability Facility (EFSF) / European Stability Mechanism (ESM) support to the firms’ indebtness. Using dynamic panel data, three models were estimated and aimed at the determination of the way that EFSF/ESM financial assistance programs could influence the impact of five firm-specific characteristics, namely growth, profitability, size, tangibility and non-debt tax shield on the capital structure of European firms. Data from 2,086 firms for the period 2003 – 2016 were used, and two dummy variables; one for the EFSF/ESM support period and one for any kind of economic crisis period were formed. The results indicated that pecking order prevailed over trade-off theory. Economic crises did not affect severely the firm-characteristics’ effects, but the EFSF/ESM programs influence appeared in three cases. During the period of EFSF/ESM assistance, profitability’s negative effect on long-term debt ratio disappeared and on total debt ratio strengthened, growth’s positive impact on total debt ratio diminished and non-debt tax shield acquired positive influence on total debt ratio. These changes might be explained by the increased levels of tax rates and decreased levels of uncertainty that the EFSF/ ESM programs caused, as well as by the reluctance of lenders to provide new funds.

Pecking Order Theory of Capital Structure: Empirical Evidence for Listed SMEs in India

The purpose of our study is to empirically examine the relevance of pecking order theory (POT) in explaining the capital structure choices made by the listed small and medium enterprises (SMEs) in emerging capital markets. To do so, we use panel data regression on five years of data from 2015 to 2019 of 82 listed SMEs in India. In pursuit of robust results to test the theory, the study uses three econometric models: pooled ordinary least squares (pooled OLS), fixed effects (FE) regression and two-stage least squares (2SLS). Profitability, liquidity, growth, tangibility and non-debt tax shield are the independent variables, size is the controlled variable and financial leverage is the dependent variable. The pooled OLS and FE models provide biased estimates due to the presence of endogeneity. The 2SLS estimates overcome endogeneity in the explanatory variable non-debt tax shield by using tangibility as an instrument. The 2SLS provides a substantial improvement over pooled OLS and FE results. The results indicate that the explanatory variables, namely, profitability, liquidity, non-debt tax shield and size, support the POT. However, the growth and tangibility do not support the POT for listed SMEs. Overall, the results of our study are inclined towards the POT, suggesting that ease of access takes priority in financing decisions by SMEs. Careful consideration of country-specific factors will allow the results to be generalized to other emerging capital markets.

Accounting theory verbalism

Based on the deductive understanding of current publications in the area of accounting theory, it is determined that it is increasingly acquiring signs of verbalism. It is caused by an excessive enthusiasm for foreign terminology, and without a balanced application in the context of accounting, since it is based on arbitrary interpretations of foreign words, as a result of which the authors fall into a semantic trap. The author emphasizes the importance of focusing not on false verbose scholastic exercises in an attempt to pretend to be the discoverers of certain ephemeris terminologies, but on the real problems of accounting, which negatively affects the state of the domestic economy. It is noted that this happened due to the growing remoteness of accounting theory from pragmatism and the predominance of utopian ideas in it, which have nothing to do with accounting, but is only an adjustment to it in order to sell books that attract buyers by the incomprehensibility of names and ignoring the fundamentals of accounting theory. After all, even such a basic financial and economic category as capital, in many cases began to affect negative numbers, and the “tax shield of an enterprise” – depreciation is considered synonymous with its antipode – depreciation of fixed assets. And instead of at least solving the problem of the targeted use of accumulated financial resources for the simple reproduction of non-current assets, in many cases not only depreciation of fixed assets, but even the capital of the enterprise is directed to the payment of dividends. In addition, the current fashion for foreign-language terms distracts scientists from unsolved problems of methodological support of accounting, obscuring them with verbalism of ephemerality, which never end with at least some pragmatic methodological developments, but only verbose attempts to convince them of their pseudo-relevance, as a result of which the accounting theory goes astray. The possibility of solving the current paradoxes regarding the main accounting categories by using the achievements of predecessors, which are recognized by the classics of accounting theory, is substantiated.

Impact of Firm-specific Variables on Capital Structure Decisions. Evidence from the Indian Hospitality Sector

This study investigates the determinants of capital structure for hospitality firms listed in India. The study validates the contradiction in the determinants of capital structure by using the data for firms listed on the Bombay Stock Exchange. Using fixed-effects regression models, the findings indicate that firm size and return on assets are significantly associated with total debt ratio (TDR), long-term debt ratio (LTDR) and short-term debt ratio. The variables such as growth rate, tangibility and volatility are found to be significantly associated with TDR and LTDR. Non-debt tax shield is found to be significantly associated with only TDR. Each of the stated determinants has a unique impact on capital structure decisions. The study partially confirms the applicability of the pecking order theory for hospitality sector firms. With the findings on hospitality firms, we hope to provide useful insights to lending institutions and corporate executives.

THE ISLAMIC VS CONVENTIONAL BANKS: AN EVIDENCE ON THE ECONOMIC DEVELOPMENT

This paper highlights how financial and conventional bank system contribute to economic growth. As the Islamic banking system is grounded on shariah’s laws and Usury/RIBA (interest) are prohibited in Islam so there will be no tax shield in this banking system and they have to pay more tax as compared to the conventional banking system. By analyzing their performance and using the gross value-added contribution of both banking systems was observed. Six banks are selected for this purpose of which 3 Islamic banks i.e. Dubai. It is quantitative research so different ratios are used to examine both banking system performance and gross value added to give us information that to what extend both banking systems are contributing to the economy. In an examination, it has been exposed that both banking systems are conducive much to economy as conventional banks are developed their infrastructure is bigger than Islamic banks where Islamic banks just start near past a few years back.

INVESTORS AWARENESS AND PERCEPTION TOWARDS MUTUAL FUND INVESTMENT:AN EXPLORATORY STUDY

Mutual Fund as an investment option gives a platform to risk averse investors who do not prefer to take high risk on their hard earned money. In India, Mutual Fund Industry is growing at a rapid pace and has emerged as a vital segment of the financial markets, specifically in channelizing and mobilizing the financial savings of hundreds of individuals in equity and debt instruments. Since investment in mutual funds is influenced by investors perception, the purpose of the present study is to examine investors awareness and perception towards mutual fund as a means of investment. The study is based on primary data collected though a questionnaire from 105 respondents residing in Delhi-NCR.Major reasons for investors preference for mutual fund investment were found to be tax benefit, security, liquidity, return and reliability. Research findings suggest that there is a significant relationship between gender and investors perception with respect to returns in mutual funds. Also, a significant relationship exists between age and investors perception with regard to higher tax shield provided by mutual funds.