Alternative Investment Opportunities Research Articles

On The Relevance And The Irrelevance Of Personal Income Taxes For The Valuation Of Equity Investments

This paper presents a comprehensive and consistent valuation approach including investor taxes (personal taxes) in addition to corporate taxes. It is shown that personal taxes do not influence the valuation result as long as the expected rate of return of an alternative investment opportunity is used as a discount rate, which is comparable in all relevant dimensions. These dimensions are the growth rates of expected cash flows, the risk associated with this growth profile, and the taxation of these cash flows relative to the taxation of potential capital gains. If, however, the alternative investment opportunity is taxed differently, e.g., by means of different tax rates to be applied or different treatment of capital gains, personal taxes become relevant. The valuation approach then has to account for the relative difference in taxation. It is shown how to modify unlevered cost of equity, cost of debt, and the weighted average cost of capital.

Discussion of: Real Investment Implications of Employee Stock Option Exercises

Some practitioners and academics believe that firms can reduce earnings-per-share (EPS) dilution from employee stock option exercises by repurchasing shares. Academic studies in this area are motivated with some combination of the following assumptions about managerial behavior: 1) managers believe employee stock options EPS; 2) managers believe share repurchases mechanically increase EPS; 3) managers and/or investors myopically focus on short-term EPS; 4) firms have severe cash constraints and high financing costs that force managers to fund EPS-motivated share repurchases with cash diverted from alternative investment opportunities. This discussion challenges the economic underpinnings of these arguments in the context of a recent paper by Bens, Nagar and Wong (2001) that investigates whether firms repurchase shares with cash diverted from profitable investment expenditures in an attempt to mitigate EPS dilution from employee stock option exercises. Specifically, this discussion suggests that there is reason to believe all of the four key assertions listed above are either incorrect or tenuous. The intuition for why employee stock options are unlikely to dilute EPS is based on theory and empirical evidence that granting options to employees is conceptually similar to raising capital through issuing stock. Employees receive stock options as an equity stake in the corporation in return for services rendered. Like any other factor in production, corporations use these employee services to earn profits. As such, stock options are not expected to be any more dilutive than other forms of equity finance, such as common stock and most stock-based securities (e.g., convertible debt, warrants, convertible preferred stock) that contribute to the shares used to compute the denominator of EPS. In fact, because employee stock options are not expensed in earnings, one can argue that they dilute EPS to a lesser extent than other forms capital. Whether share repurchases mechanically increase EPS depends on whether the foregone return on cash used for repurchases is less than or greater than the ratio of the firm's earnings to the market value of equity (i.e., the earnings-to-price ratio). Given that earnings-to-price ratios have been in the 0.02-0.05 range for most firms in recent years, it is reasonable to expect that share repurchases actually decrease EPS for the majority of firms. Finally, the question of whether EPS-motivated share repurchases cause firms to divert cash from alternative investment opportunities requires the existence of severe cash constraints and high financing costs and/or the widespread absence of rational expectations on the part of management, conditions that are unlikely to be met for many firms that are accused of this practice.

The Policy Implications of Portfolio Choice in Underserved Mortgage Markets

Home ownership increases the incentive to maintain property and neighborhood, as well as decreasing the outflow of rents from low-income zones. However, these benefits are not costless to homeowners. With a mortgage comes the possibility of default, the financial demands of maintenance, a reduction in alternate investment opportunities, an increased exposure to fluctuations in local economic conditions, and a drastic reduction in the liquidity of personal wealth. Recently, policy makers have sought to increase mortgage lending in traditionally underserved markets. In this paper we consider the effects of this policy in light of the risk and return of housing and the current tax treatment of the home mortgage deduction. We find housing to be a relatively poor asset class in which to invest the bulk of family wealth. Trends in housing suggest that a large percentage of homeowners who bought and sold within a five year horizon in the United States over the last twenty years lost money on the investment. Lowering the equity required to purchase a home does little to alleviate the problem. We show that the current tax code - if anything - encourages renting over buying and gentrification of low income housing markets. If the government wishes to encourage home ownership among low income families despite the risks, then we argue that government agencies should share information about the risk and return of home ownership with its citizens. In addition, a direct subsidy through a tax credit may be both warranted and necessary to achieve the desired result.

Commodity checkoff programs as alternative producer investment opportunities: The case of soybeans

Evaluations of commodity checkoff programs generally involve benefit-costs analyses. The typical benefit-cost approach, however, provides no clear criteria for judging whether program benefits exceeds the costs sufficiently to warrant continuation of the program. This article proposes a method for evaluating a commodity checkoff program as an alternative investment opportunity facing producers which allows a ranking of the program among investment alternatives facing producers. The procedure is demonstrated through an analysis of the soybean checkoff promotion program. The analysis clearly indicates that the soybean checkoff program has performed well as an investment alternative for soybean farmers and warrants consideration for continuation. In contrast, a benefit-cost analysis of the soybean checkoff program yields ambiguous results regarding both the magnitude of the producer benefit and whether the benefit is sufficiently large relative to cost to justify continuation of the program. [Econ-Lit citations: Q130, M300, M370] © 1999 John Wiley & Sons, Inc.

Türk Mobil Telekomünikasyon Pazarı Ve Özelleşme

The future of telecommunications is going towards the mobile end. Therefore, mobile markets all around the world do attract greater interest than the other alternative investment opportunities. Like everywhere else, Turkish market also supports this phenomenon, as the upcoming cellular licenses attract most of the interest both domestically and internationally. This article presents the significance of the Turkish mobile market by taking a look at its historic growth and future prospects. Besides, it also explores the genuine business opportunities available for the private companies within the area of mobile telephone under the current legal framework surrounding such a transaction.

Risks and Incentives in Underserved Mortgage Markets

Subsidized loans may help increase home ownership in low income neighborhoods with positive social benefits; however, there are risks and costs to the homeowners themselves. Home ownership increases incentives to maintain property and neighborhood, as well as decreasing the outflow of rents from low-income zones. These benefits however are not costless to participants. With a mortgage comes the possibility of a default, the financial demands of maintenance, the reduction in alternate investment opportunities, an increased exposure to fluctuations in local economic conditions, and a drastic reduction in the liquidity of personal wealth. In this paper, we examine the role of the owner-occupied house in the asset allocation decision of a family living in an area characterized as a low income neighborhood. We find that the current subsidies are likely to be too low relative to the costs. In particular, the tax law makes home ownership relatively less attractive to low-income families. This may explain a lack of home ownership and, thus, mortgage lending in low-income neighborhoods.

Health services financing in Greece: a role for private health insurance

Private health insurance can play a significant role in the financing and delivery of health services in relatively undeveloped health systems which suffer from limited public expenditures, resource shortages, and quality of care problems. Research results, however, indicate that private health insurance in Greece has not yet assumed that role. The rapid increase of private health insurance was the result of underfinancing by the public sector and restrictive policies for the private sector. The private sector, however, largely financed by private health insurance, found alternative investment and profit opportunities, which, unfortunately, did not improve health system microeconomic efficiency. In this paper we propose that a way of cooperation could exist between the public sector and private health insurance, which would improve public health services provision and the overall technical, allocative and dynamic efficiency of the health system.

Prospect Theory Predictions When Escalation Is Not the Only Chance to Recover Sunk Costs

Two experiments tested the effect of risk of alternative investment opportunities on decision behavior in an escalation context. In the first experiment (n = 170), the risk of the reinvestment option, which had been unsuccessful and incurred a sunk cost, was held equal to that of an alternative investment project. Responsibility for the previous decision was manipulated between these subjects. Subjects were required to choose between the reinvestment option and the alternative. Responsible subjects demonstrated classic reinvestment (escalation) tendencies, and nonresponsible subjects exhibited a significant tendency to avoid reinvestment. Subjects in the second experiment (n = 195) completed the same decision task and were also assigned to high and low responsibility conditions. In this experiment the risk of investing further in a previously chosen project, relative to the risk of the alternative project, was manipulated. Those subjects who were responsible for the first decision (a) demonstrated no preference for or against continued pursuit of the initial project (i.e., there was no escalation tendency) and (b) preferred the less risky of the second investments, regardless of whether it was or was not the initially chosen project. Nonresponsible subjects showed no risk preference or proclivity for reinvestment. The results of these experiments suggest that salient information concerning relative risk dominates the effect of prior performance information when alternative investments are considered. We discuss the implications of these findings for decision theory and for methodology in commitment escalation research.

Adoption of herbaceous weed control by southern forest industry

Herbaceous weed control has been demonstrated to confer a significant growth advantage to southern pine plantations, thereby accelerating harvest schedules and enhancing the economic attractiveness of regeneration investments. Despite this attractiveness, previous research suggests that herbaceous weed control technology has been adopted by industries in the South on only a small portion of the potentially applicable area. This paper discusses the extent to which herbaceous weed control is being used by southern forest industries and identifies factors influencing its adoption. We hypothesize that a combination of more attractive alternative investment opportunities, environmental or legal concerns, perceived public concern over chemical use, and a planning cycle time lag may partially explain the apparently slow rate of herbaceous weed control adoption. The study data comprise results from a mail survey of industrial herbaceous weed control users in the South.

A coalition proof equilibrium for a private information credit economy

This paper examines an economy in which agents with private information about their own productive capabilities seek to raise capital to fund their investment projects. We employ an equilibrium concept which is closely related to Coalition Proof Nash Equilibrium. In equilibrium, all agents who succeed in raising capital (entrepreneurs) are pooled; they all receive the same contract or consumption schedule. Entrepreneurs, however, are separated from those who fail to raise capital. This separation results in productive efficiency for the economy. If the economy has no viable alternative investment opportunity (other than agents' projects) then equilibrium allocations can be supported by a (non-intermediated) securities market. If there is a viable alternative, the equilibrium allocations cannot be supported by a securities market equilibrium. We interpret this case as suggesting the emergence of financial intermedary coalitions.

Allowing for asset, liability and business risk in the valuation of a life office

AbstractThe theme of this paper is that life office valuation can be based on an analysis of the characteristics of the individual cash flows which form the net cash flow of an office. These cash flows may be compared with the income and gains derived from traded securities such as equities and gilts in order to assess their values. Standard asset pricing models of modern portfolio theory enable one to allow for lapse, mortality and other risks.The methodology outlined in the paper is illustrated by reference to the very different types of revenue generated by non-profit, unit-linked and with-profits products. It is also used, in the valuation of future new business, to allow for the risks that expected sales volumes and profitability levels will not be achieved.The paper provides a rationale for the choice of discount rates used in the valuation of a life office and facilitates the comparison of life office and alternative investment opportunities.

Analysing stock market behaviour in a small capital market

This paper investigates the behaviour of the stock market prices for a small capital market, as is the case of the Greek market. The results suggest that the behaviour of the stock market index is mainly related to alternative investment opportunities and socio-political factors, as compared to companies' profits and economic activity.

Assessing Risk in Estimating Hydrocarbon Reserves and in Evaluating Hydrocarbon-Producing Properties (includes associated papers 18606 and 18610)

Summary The petroleum industry has written extensively on the risk associated with exploration. Very little has been published, however, addressing the risks associated with acquisition and operation of producing properties. Because capital budgets usually depend on the income a company realizes from its producing properties, and because current conditions have been interpreted by many to favor the acquisition of existing oil reserves over exploring for new ones, the risk in estimating reserves and in estimating future cash flows for producing properties has taken on a new importance. The risks associated with estimating the reserves and value of a hydrocarbon-producing property are divided into three classifications:the technical risk that the hydrocarbon values estimated by the geologists and engineers do exist in the ground and that the recoverable amounts can be recovered within the time frame projected by the engineers;the economic risk that product prices, operating costs, equipment costs, inflation, and market conditions will be in reasonable agreement with the assumptions used in the economic analysis; andthe political risk that world economics, international political stability, taxation, and regulations will not be significantly different than projected in the evaluation. This paper focuses on these risk categories and presents methods for implementing risk estimates in the evaluation of a producing property, taking into account the maturity of the technical data, the location, and the life of the property. A Glossary of important terms is included. Introduction The two most important concerns about a producing property are its producing rate and its reserve. The producing rates from the properties, together with oil and gas prices, operating costs, and taxes, control the company's cash flow. The company's reserves are most likely the collateral for its credit and provide the basis for any business transaction, such as property acquisition, sale, or merger. Because capital budgets usually depend on the income a company realizes from its producing properties, and because these capital expenditures frequently are sized on the engineer's estimates of reserves and producing rates, the uncertainty in estimating and evaluating hydrocarbon reserves, while always important, is taking on new critical dimensions under current industry conditions. High exploration costs and poor success ratios have been interpreted by many to favor the acquisition of existing oil reserves in the ground over exploring for new ones. Therefore, it is extremely important that not only oil industry management but also the financial world, which provides funding for much of what we do, understand the risks and uncertainties in evaluating producing properties. The literature indicates an informal distinction between "risk"and "uncertainty." Although frequently used as synonyms, "risk,"for the most part, has been applied to exploration where there is a risk of complete failure or of some degree of success. There is the risk of drilling a dry hole vs. making a discovery of undetermined value. The term "uncertainty"is most frequently applied to properties already found to be productive but whose profitability cannot be quantified. The current unstable conditions in our industry point out that even though a property is productive, it can still result in a financial loss, and regardless of the term one uses, any technique that properly assesses the risk of acquiring a property vs. alternative investment opportunities is worth understanding. There is even the uncertainty of assigning uncertainty; most engineers, having no good quantitative idea of uncertainty, almost universally tend to understate it. By overstating the precision of their own knowledge, they contribute to decisions that may lead to financial disappointment. The uncertainty associated with estimating the reserves and value of a hydrocarbon-producing property change with time (Fig. 1) and may be divided into three classifications: technical, economic, and political.

Farm size structure in Greek agriculture

Although the average farm size in Greece has increased since 1960, there has been no decline in the percentage of farms in the smallest-sized group. The continued existence of these small farms can be attributed to part-time farming, and to the farm-family life cycle. In addition, the lack of alternative investment opportunities retards the change in land ownership structure. The average farm size over regions is found to be negatively related to population pressure, positively related to industrialization, and positively related to mechanization. The EC structural policy, presently combined with restrictive price policy, is expected to stimulate average farm-size growth. Copyright 1986 by Oxford University Press.

Farm tenancy in the United Kingdom

Tenancy has declined from its once dominant position and now only accounts for 35–40 per cent of the land area in Great Britain. The reliability of tenure statistics is open to criticism since they do not adequately account for the complexities of tenancy arrangements, particularly of those between members of the same family. The overwhelming majority of tenanted land is privately owned. Little is known about these private landlords beyond the fact that the legal device of the ‘Trust’ is commonly used to enable land to be passed between generations of a family; far more is known about the minority group of public, and semi-public, landlords. The total long-term rewards to landlords seem broadly comparable with those from alternative investment opportunities, although the smallness of the market in let land and the infrequency with which farms become available for new tenants cast doubt on the ability of the price mechanism to perform its rôle in indicating rates of return. Many of the supposed advantages of tenancy over owner-occupation, especially in terms of production efficiency, the recruitment of management and the provision of capital, are not supported by evidence. Legislation aimed at protecting and promoting the interests of tenant farmers, though recently revised, has led to a contraction in the area of land available for renting, constricting the ability of established tenants to expand and virtually closing tenancy to new entrants without farming parents. In an attempt to regain flexibility in land adjustments, non-traditional forms of arrangements between landowner and farmer have been explored, although these are unlikely to make rapid progress because of the small number of farms which are available annually for re-letting. Meanwhile, tenancy seems set to decline further.

Parametric discounting

A parametric approach to the problem of selection from amongst alternative investment opportunities is considered in a discounted cash flow framework. The approach employs differential cash flows, an uncertain planning horizon and a nested approach to composing cash flow parameters. This promotes consistent treatment of alternative investments, clarifies the effects of uncertainty, avoids some of the defects of internal rate of return and payback period criteria and allows direct comparison of best and next best options as primal and dual versions of the same model. Net present value, internal rate of return, annual average cost or payback period assessments may be selected post analysis. A domestic wall insulation example is used for illustrative purposes. This example is related to the hydroelectric power development decision which gave rise to the approach.

The importance of patent term restoration to pharmaceutical innovation.

D uring the past thirty years, pharmaceutical innovation in the United States has declined dramatically. As a result of the increased time needed for testing and other regulatory requirements, the effective patent life of a new pharmaceutical product has been reduced to less than half of the seventeen-year patent term set by Congress for all inventions. Legislation to restore this lost patent protection is urgently needed to reinvigorate investment in pharmaceutical research. A recent report of the National Academy of Sciences defined “innovation” in the following way: Economists define technological innovation as the initial commercial application of a new product or process. From the standpoint of the industrial firm, the activities leading to innovation involve a long-term investment decision process. This process incorporates the various stages of research, development, capital investment, and commercialization. A firm’s investment in these activities are influenced by the same basic forces that govern outlays on other investment projects. Thus, investments for R&D and innovation will be determined by their perceived profits and risks relative to alternative investment opportunities as well as the cost and availability of funds for investment. In the pharmaceutical industry, innovation is thus best measured by the number of new chemical entity (NCE) drugs approved by the Food and Drug Administration (FDA) for marketing during any particular time. These NCE drugs represent, in the words of the National Academy, “the initial commercial application of a new product or process.”

Decision‐making Criteria for Purchasing Milk Quota at the Individual Farm Level

SummaryDairy farmers wishing to contemplate purchases of additional quota should first consider what the appropriate time horizon on their investment should be. If the chosen time horizon is one year or less, the problem of estimating how much they can afford to bid for quota can be solved with simple budgeting techniques. On the other hand, if the time horizon is taken as several years, and this would seem rational, then capital budgeting techniques are required. However, in either case, investment in additional quota should be compared with alternative investment opportunities before a final decision is made.Where capital budgeting techniques are used, a modification of the net present value approach permits the farmer to take account of his time preference for money, and allows calculation of the break‐even price, or the maximum affordable price to pay for additional quota. This approach necessitates the provision of estimates of the expected net returns from investing in quota for each year of the selected time horizon, as well as provision of estimates of the salvage value of the quota and an appropriate discount rate. The calculation of the expected net returns figures represents the most difficult task for the farmer. If expansion of milk shipments rests upon increasing output of milk per cow, then the short‐run production function and marginal cost curve provide the appropriate reference points. The expected net return on investment in quota is then given by the area under the marginal revenue line and above the relevant portion of the marginal cost curve.If, however, all short‐run variable input decisions have already been implemented at the optimum level, and expansion of milk shipments depends upon expanding the number of cows, or the “fixed” plant and equipment, or both, then the average total cost curve is the appropriate reference point. The expected net return on investment in quota is then represented by the difference between total net revenue at the new planned level of output and total net revenue at the existing level of output.

Alternative Cost-of-Capital Concepts in Regulation

At the present time two cost-of-capital concepts are more widely used than any other in regulation as a basis for determining the cost-of-equity capital. One of these is the discounted-cash-flow (DCF) concept which is based on a dividend valuation model of common stock prices. The other concept widely used in regulation is the comparable-earnings concept. The economic rationale for comparable earnings as a cost-of-capital concept presumes that investors have the opportunity to invest in direct investment and that the earnings on book value of alternative comparable investment opportunities is therefore properly considered to be the opportunity cost of capital. According to the National Association of Regulatory and Utility Commissioners, more than half of the state commissions presently rely upon or accept comparable earnings as a method of determining the cost of equity for public utilities. Only about one-third of the state commissions have indicated an acceptance of DCF. The paper begins with a review and critique of the comparable-earnings concept as it is applied in regulation, and argues, among other things, that the comparable-earnings approach violates a fundamental marginal condition necessary to achieve efficiency in the allocation of capital, and generally results in an overestimate of the cost of equity.more » The paper then reviews the corresponding strengths and weaknesses of the DCF approach and suggests that DCF embodies a proper concept of return at the margin that makes it preferable to comparable earnings as a regulatory tool for determining the cost of equity for public utilities. (MCW)« less

Valuation and Asset Selection Under Alternative Investment Opportunities

Valuation and Asset Selection Under Alternative Investment Opportunities