DCF Methods Research Articles

A Practical Approach to Determine NPV, IRR, and MIRR Ranking Conflicts With Excel

DCF methods, except the case of multiple IRRs, identify good projects when analyzed individually. However, all might conflict when ranking projects. MIRR, a method that addresses the multiple IRR problem, is a complex method for analyzing investments as it includes a reinvestment rate. Most finance textbooks do not discuss, even though some mention, the ranking conflict between NPV and MIRR. Along with the known conflict between NPV and IRR, we present an original method to determine if there is a conflict between NPV and MIRR, and the regions of the discount rate where a conflict is present or not. This method, verified by an Excel analysis, is useful to practitioners and educators alike.

Evaluation of impairment mitigations for optical fiber communications using dispersion compensation techniques

This study discusses dispersion as a key issue influencing the performance of optical fiber communication technology. Poor bit rate, pulse broadening, and transmission distance restrictions are the outcomes. The dispersion correction method frequently employs fiber with dispersion compensation (DCF) and fiber Bragg grating (FBG). A model transmission system has been analyzed in light of numerous parameters using the Opti System 20.0 simulator. The DCF and FBG dispersion compensation methods are two that have been proposed. The Q-factor, BER, and eye height measured at the receiver end will be utilized as three metrics to describe the results of the two dispersion-correcting strategies. Additionally, the system's transmission performance will vary as a result of varied compensatory approaches. The DCF approach does not significantly increase system performance compared to the compensation technique. In addition, the properties of the optical fiber used for transmission in the system affect the characteristics of the FBG and the fiber used for the compensating process. It has been demonstrated that post-compensation, followed by symmetrical compensation, produces the best result. In addition, the transmission performance of the system with different compensation methods will be different, and the compensation technique will improve the system performance much better than the DCF technique. Moreover, the characteristics of the FBG and the fiber that is used for the compensation process depend on the characteristics of the optical fiber that is used for the transmission in system. It is shown that the symmetrical compensation performance is the best. Due to the nonlinear nature of propagation, system performance depends on power levels, followed by post-compensation.

DCF Methods and Implicit Re-Investment Assumptions: Changing Reinvestment Rate, Consequences And Modified Methods

DCF Methods and Implicit Re-Investment Assumptions: Changing Reinvestment Rate, Consequences And Modified Methods

Feasibility Study of Student Financing Startup Company for BRI Ventures Investments Study Case of: “Company A”

The problem faced by BRI Venture is to determine the feasibility of investing in Company A, a start-up in the student financing market in Indonesia. The valuation of start-ups in Indonesia is difficult, making it challenging for BRI Venture to assess the viability of the investment. This study aims to provide a comprehensive analysis of the factors affecting Company A’s business, both internally and externally, in order to make an informed investment decision. The study focuses on three key research objectives: (1) to examine the macroeconomic and industry impact on Company A’s business by using Porter’s Five Forces model, PESTLE model, and market sizing; (2) to examine the internal aspects impacting Company A’s business by using the VRIO model; and (3) to determine the valuation of Company A by using the DCF and relative valuation methods. The findings of the study reveal that the Indonesian student financing market presents both opportunities and challenges. The PESTEL analysis highlights the increasing demand for student loans in Indonesia, creating growth opportunities for the industry. However, the Five Porter framework analysis highlights the intense competition, strong buyer bargaining power, and weak supplier bargaining power, which may make it difficult for new entrants to succeed. The VRIO Framework analysis suggests that Company A has a number of sources of sustained competitive advantage, including adaptable repayment terms, technological capabilities, and market position, indicating that Company A’s internal situation is strong. The Absolute Valuation and Relative Valuation results indicate that Company A valuation is between $59 million and $73 million. In conclusion, while the Indonesian student financing market presents a growth opportunity, BRI Venture must carefully consider the challenges and competition in the market before making an investment in Company A. The internal analysis of Company A suggests that it has a strong position in the market, with a range of assets and competencies that can offer a sustainable competitive advantage. The valuation results provide a range of potential equity stake that BRI Venture could ask for if an investment in Company A is made.

DEGRADASI PERUSAHAAN PADA INDEKS LQ45

<em>The purpose of this study is to analyze the degradation of companies in the LQ45 index. The population of this study is companies listed on the LQ45 index from February 2019 to July 2019. Total populations are 45 companies. The research sample used purposive sampling of 3 companies. The data is sourced from audited company financial statements downloaded from the Indonesia Stock Exchange website. The analytical method used is a horizontal analysis method that is comparing financial statements for several periods. The models studied are NOPLAT, FCF, ROIC, and CFI from DCF methods. Based on the NOPLAT analysis, all three companies were able to create net operational profits. Based on the FCF analysis, only PT Waskita Beton Precast Tbk. revenue’s that able to support its business development activities. Based on the ROIC and CFI analysis, only PT Elnusa Tbk. tended to be stable in providing funds to pay debtholders and stakeholders.</em>

Capital budgeting practices of SME in Baden-Württemberg: findings of an emperical study

Companies' success strongly depends on the right investment decisions. This paper sets out to explore the status quo of capital budgeting from SMEs in southwestern Germany. This includes the investment decision making process in context of capital budgeting, with its functional, instrumental and institutional design. Based on a literature review including a previous study evaluation, a survey was developed and, with a final sample size of 73 SMEs, a web-based questionnaire carried out. Main results are that many decisions are based on experience values and investment appraisal techniques are used insufficiently, especially the DCF methods are not applied by a large number of companies. Furthermore, there is a lack of standardisation within capital budgeting, an overview of potential for improvement is provided. Besides this it seems that investment decisions of smaller companies are more often based on intuition. In addition, it is found that the larger the company the more tasks are split within the functional area in order specialise the finance departments.

Valuation of Companies in Need for Financial Restructuring: The Case of Eurotunnel

The Eurotunnel was a hugely complex construction project. It was also a difficult financial engineering Project that to this day continues to need support from banks and shareholders. The paper analyzes the tunnel’s financial performance and the various DCF methods being used to achieve present value.

Environmental, Social, and Governance Investment and Material Disclosure by Companies

Although institutional investors have generally used the discounted cash flow method (DCF method) in their valuation processes, it has become essential to enhance valuation precision for an extended period by applying the appropriate discount rate as a denominator and future cash flows as a numerator. We examine the relationships between WACC (weighted average cost of capital), which is generally used as a discount rate in the DCF methods in business, and ESG (Environmental, Social, and Governance) score to incorporate ESG issues into the mid-to-long term valuation process. We observe a negative relationship that is statistically significant between environmental score, evaluated based on degree of disclosure, and the WACC. We also observe negative relationships between environmental, social, and governance scores in a group with high firm-specific information (with high unsystematic risk) and the WACC. These results suggest that the value of companies with a high degree of disclosure of ESG could be high. We propose that investors should use a discount rate adjusted by ESG in their valuation processes, and companies should disclose ESG risks and opportunities, which they recognize, and use countermeasures so that investors can enhance mid-to-long term valuation precision.

The Relation between the Readability of Accounting Footnotes Information and the Company Value of the Appraisal Reports of Public Tender Offer in Brazil

We studied the relation between the Accounting footnotes readability and company value, using five metrics to measure readability: word, sentence, and paragraph lengths, numbers of graphic elements and pages. To obtain the company value, we used appraisal reports of public tender offer to acquire shares from the last nine years, which got to a 90 Brazilian company sample. The methods analyzed were: discounted cash flow, market price of shares after the public tender offer announcement, multiples, and equity book value. The results showed a high correlation between the sentence length and all four valuation methods, while the OLS multiple regression showed a relation between the footnote readability component that included word and sentence lengths and company valuation by DCF and equity methods. The other indexes showed no relation to the company value, except when we use the share price before the announcement as a control variable, then, it becomes significant for the equity method.

Compensation of Dispersion in Optical Communication Systems using DCF and FBG Methods

Compensation of Dispersion in Optical Communication Systems using DCF and FBG Methods

Hemoshear, Llc: Series C Round Financing

The HemoShear case is designed to provide an opportunity for students to factor in the dilution of a potential Series D round in the valuation of the Series C round. It also highlights the issue of whether venture capitalists will treat the Series D round as a fourth round of funding or as a first round of institutional funding (i.e., a Series A round). This discussion is designed to illuminate the differences between goals and return requirements of angel investors and venture capitalists. Because the evolving nature of HemoShear's technology is not well captured by the VC or DCF methods of valuation, the case also mentions other pharmaceutical companies that used real options as a valuation approach, which is designed to be discussed qualitatively within the context of the other issues addressed in the case. This case is studied in Darden's “Entrepreneurial Finance” elective.HemoShear, LLC, is a start-up firm with promising technology that can give pharmaceutical companies advanced insight into the safety and efficacy of their new drug compounds. In March 2012, the firm seeks to raise $3 million in a Series C round from angel investors to scale the business, add key management staff, and move to a new facility. Prior to the Series C round, HemoShear had raised $700,000 in two friends-and-family rounds to complete proof-of-concept studies and establish an independent testing facility; another $8.4 million was raised in subsequent Series A and Series B angel rounds to fund continued development. Although the company has made significant strides in developing its research and business, it is likely that the firm will need to raise another $10 million in a Series D round in two or three years. At that point, having exhausted the resources of local angel investors, HemoShear may need to turn to venture capitalists to raise the Series D round funding. Excerpt UVA-F-1703 Oct. 7, 2013 HemoShear, LLC: Series C Round Financing In May 2012, HemoShear CFO Brian Campbell sat in his office considering how to present his company to potential investors for a Series C round of financing. In the four years since Campbell had discovered the company at an innovation conference in late 2007, HemoShear had incorporated; established a board of managers, an industry advisory board, and a scientific advisory board; raised $ 700,000 in two friends and family rounds to complete proof-of-concept studies; established an independent testing facility; and raised $ 8.4 million in subsequent Series A and Series B angel rounds to fund continued development. The company was now preparing to raise a minimum of $ 3 million to scale the business, add key management staff, and move to a new facility. Although HemoShear had achieved significant milestones over its short history, Campbell was not sure what valuation the company would receive from investors for the Series C round. Further, given the “game-changing” nature of HemoShear's technology and the immense optionality embedded in the product, Campbell was concerned that the conventional venture capital (VC) method might undervalue the company, and he planned to investigate alternative approaches to better capture its latent value. . . .

Capital Budgeting Practices in Nepal: A Survey

This study aimed at ascertaining the adequacy of financial resources for capital investment, financial objectives, qualitative factors, capital budgeting techniques, minimum return standard, and method of measuring the risk in the context of Nepalese enterprises. The study was based on questionnaire survey of 65 financial executives conducted in 2006. The study revealed that the majority of respondents did not have adequate resources for investment in fixed investment. The majority of the enterprises had plan to increase their investment in fixed assets. The major type of capital budgeting project was related to expanding plant capacity, followed by adding new product line, undertaking reorganization/modernization program, and undertaking replacement activities. It was observed that DCF methods, which were regarded as theoretically sound methods, did not reveal to be the most preferred methods of capital budgeting evaluation.As regards qualitative factors, the most important factor was legal factors while the least important factors were employee safety and morale. With respect to minimum required rate of return for the accept/reject criterion in capital budgeting evaluation, ‘management determined target rate of return’ was observed to be the most popular one. The weighted average cost of capital did not appear to be the most preferred standard.Concerning the cash flow forecasting methods in capital budgeting, the most preferred method was observed to be management’s subjective estimates. The quantitative methods were used less by Nepalese enterprises while estimating cash flows.The most preferred definition of risk in capital budgeting was observed to be the probability of not achieving target return. The majority of Nepalese respondents did not use any formal risk analysis technique. For those who were using risk analysis technique, the important methods were, shortening the payback period and raising required rate of return.

Wybrane wskaźniki rentowności sektorów niefinansowych w Polsce w latach 2006-2013

The paper aims at comparing profitability ratios in non-financial sectors in Poland and at revealing the differentiation of the ratios in the sector. As the research comprises years 2006-2013 the paper will show whether the financial crisis has had an impact on profitability of the researched sector and what is its extent. The paper will also make an attempt to evaluate the profitability risk in particular sectors by means of a standard deviation. Historical information on profitability of particular sectors will be supplemented with a comparison of anticipated rates of return calculated by means of DRI and DCF methods.

Capital Budgeting Practices in Non-manufacturing Companies in Poland

This paper aims at analyzing the diffusion of investment appraisal methods in non-manufacturing companies Poland. In particular, it deals with the relationships between the methods used and the selected characteristics of companies. The questionnaire was completed in 2012 by representatives of non-manufacturing companies operating in Poland and focused on three areas: (a) general firm characteristics, (b) organization of investment process, (c) investment evaluation methods used.The questionnaire research has shown that service companies in Poland use the same investment appraisal methods as companies in more developed countries; however, the diffusion of these methods is less. What is more, a foreign origin of equity capital, the magnitude of the capital expenditures budget, and a company size have significant and statistically positive influence on the investment appraisal methods in use, especially on: (a) formalization of the investment appraisal process, (b) the use of discounted cash flows – DCF methods, (c) employment of risk assessment methods, and (d) audit after closing the investment process.The author believes that the study bridges the gap in management accounting literature and researchers will use the results of this study to question current ideas and develop new theories. The results of the conducted study may also help practitioners identify the areas in their companies where academic recommendations have not been implemented and their use could be beneficiary for the company due to the fact that they facilitate activities which create value of the company.DOI: http://dx.doi.org/10.5755/j01.ss.82.4.6612

Measuring the apparent phase speed of propagating EUV disturbances

Context. Propagating disturbances of the EUV emission intensity are commonly observed over a variety of coronal structures. Parameters of these disturbances, particularly the observed apparent (image-plane projected) propagation speed, are important tools for MHD coronal seismology. Aims. We design and test tools to reliably measure the apparent phase speed of propagating disturbances in imaging data sets. Methods. We designed cross-fitting technique (CFT), 2D coupled fitting (DCF) and best similarity match (BSM) to measure the apparent phase speed of propagating EUV disturbances in the running differences of time-distance plots (R) and background-removed and normalised time-distance plots (D). Results. The methods were applied to the analysis of quasi-periodic EUV disturbances propagating at a coronal fan-structure of active region NOAA11330 on 27 Oct. 2011, observed with the Atmospheric Imaging Assembly (AIA) on SDO in the 171 A bandpass. The noise propagation in the AIA image processing was estimated, resulting in the preliminary estimation of the uncertainties in the AIA image flux. This information was used in measuring the apparent phase speed of the propagating disturbances with the CFT, DCF and BSM methods, which gave consistent results. The average projected speed is measured at 47.6 ± 0.6 km s-1 and 49.0 ± 0.7 km s-1 for R and D, with the corresponding periods at 179.7 ± 0.2 s and 179.7 ± 0.3 s, respectively. We analysed the effects of the lag time and the detrending time in the running difference processing and the background-removed plot, on the measurement of the speed, and found that they are fairly weak. Conclusions. The CFT, DCF and BSM methods are found to be reliable techniques for measuring the apparent (projected) phase speed. The samples of larger effective spatial length are more suitable for these methods. Time-distance plots with background removal and normalisation allow for more robust measurements, with little effect of the choice of the detrending time. Cross-fitting technique provides reliable measurements on good samples (e.g. samples with large effective detection length and recurring features). 2D coupled-fitting is found to be sensitive to the initial guess for parameters of the 2D fitting function. Thus DCF is only optimised in measuring one of the parameters (the phase speed in our application), while the period is poorly measured. Best similarity measure is robust for all types of samples and very tolerant to image pre-processing and regularisation (smoothing).

Valuation of entrepreneurial businesses

“A small business is not a little big business” (Welsh and White, 1981) – this also holds true for valuing small businesses. Such companies act in utmost imperfect markets, are generally unique and the forecast of their future profit is rather difficult. These characteristics impede the use of DCF and real option methods, as well as of multiples. Therefore, this paper presents the functional valuation theory as an alternative approach to valuation. Its partial and general models allow a better adaption to the characteristics of entrepreneurial businesses, especially when these models are combined with a Monte Carlo simulation.

Mid-Year and End-of-Year Conventions in Achieving Convergence Among Discounted Cash Flow Models

In my paper, I have managed to achieve full convergence of the results of valuation executed by four methods (CCF, APV, DCF and CFE), provided that cash flow is generated throughout the year (Mid-Year Convention). I have shown that convergence among all methods can be achieved whether we use the End-of-Year Convention or Mid-Year Convention. I have demonstrated an analytical solution to the circularity problem in practice using the End-of-Year Convention proposed by Velez-Pareja and Mejia (2010). Based upon their solution to the circularity problem I propose a new, universal solution to achieving convergence among all methods on the condition that the Mid-Year Convention holds true. All four methods coincide with the APV and CCF methods, which are the best methods to calculate value without circularity. These two methods require neither target leverage nor iterations.One of the most significant findings of this paper is how the generally accepted Mid-Year Convention (the 0.5 time-factor) differs from the accurately calculated, proper Time-Factor for the FCF and CFE methods which has to be applied in order to achieve convergence among all four methods. I have proved scientifically that the generally accepted Mid-Year Convention (the 0.5 time factor or approximately 0.5) produces significant bias in the DCF and CFE methods which can materially distort the resulting values. Now I can soundly argue with many authors and some practitioners who state that annual cash flow with the generally accepted mid-year factor (0.5 or approximately 0.5) does not produce a material bias in the cash flows on a daily, weekly or monthly basis.

An analysis of cost of capital, capital structure and capital budgeting practices: a survey of South African listed companies

This study employs a sample survey to determine and analyse the corporate finance practices of South African listed companies in relation to cost of capital, capital structure and capital budgeting decisions.The results of the survey are mostly in line with financial theory and are generally consistent with a number of other studies. This study finds that companies always or almost always employ DCF methods such as NPV and IRR to evaluate projects. Companies almost always use CAPM to determine the cost of equity and most companies employ either a strict or flexible target debt‐equity ratio. Furthermore, most practices of the South African corporate sector are in line with practices employed by US companies. This reflects the relatively highly developed state of the South African economy which belies its status as an emerging market. However, the survey has also brought to the fore a number of puzzling results which may indicate some gaps in the application of finance theory. There is limited use of relatively new developments such as real options, APV, EVA and Monte Carlo simulation. Furthermore, the low target debt‐equity ratios reflected the exceptionally low use of debt by South African companies.

Venture Capital Investments and Financing in Estonia: A Case Study Approach

The aim of the article is to describe how Estonian venture capitalists make financing and investment decisions, and compare these results with theoretical recommendations found in corporate finance and venture capital literature. The focus is on the methodological procedures in venture capital investment and financing. A case study approach is used to collect information about the current practice of venture capital investments and financing in Estonia. Five of the largest Estonian venture capital funds were analyzed in this article, and different problems have been presented in the article. Some of them require an academic and some a practical solution. The problems are divided into four parts: venture capital deal structuring, corporate governance and investor protection, the cost of venture capital and valuation. Venture capital deal structuring is discussed first, and we look at of the following topics: syndication, staged investment, use of financial instruments, ownership share and dilution problems. Syndication of investments, staged investments and convertible financial instruments are used quite rarely by Estonian venture capitalists. Most Estonian venture capitalists take a minority holding in their portfolio companies and the ownership share changes mainly due to the use of convertible instruments and financial options. Estonian venture capitalists do not consider this kind of dilution a big problem. Most Estonian venture capitalists do not have a measure of the required rate of return as considered in financial theory. The determination of the rate of return among Estonian venture capitalists is more intuitive: they use an internal rate of return instead. The required rates of return used by Estonian venture capitalists have about the same interval as in the rest of the world. Corporate control and investor protection are important issues in the venture capital process. These are closely linked to deal structuring. The Estonian Commercial code has average investor protection, but it restricts the use of preferred shares, which are often used in venture capital deal structuring abroad. Some corporate control problems have arisen at the board level in Estonia. Although venture capitalists do not use complicated models to find the cost of capital, they pay much more attention to complicated valuation models. Multiples, book value, and DCF methods are used. Numerical analysis is not as important as the authors expected. Much attention is paid to the linkages between these themes.

Market Discipline and Internal Governance in the Mutual Fund Industry

We develop a continuous-time model in which a portfolio manager is hired by a management company. Based on observed portfolio returns, all agents update their beliefs about the manager's skills. In response, investors can move capital into or out of the mutual fund and the management company can fire the manager. Introducing firing rationalizes several empirically documented findings, such as the positive relation between manager tenure and fund size or the increase of portfolio risk before a manager replacement and the following risk decrease. The analysis predicts that the critical performance threshold which triggers firing increases significantly over a manager's tenure and that management replacements are accompanied by capital inflows when a young manager is replaced, but may be accompanied by capital outflows when a manager with a long tenure is fired. Our model yields much lower valuation levels for management companies than simple applications of DCF methods and is thus more consistent with empirical observations.