Discounted Cash Flow Model Research Articles

The identification of geographical factors on the determination of the value of agri-food companies

PurposeThe purpose of this paper is to provide evidence about the role of the geography on agri-food firms’ valuations. The goal is to test clusters and agglomeration effects on the SMEs valuations.Design/methodology/approachThe authors propose an empirical test applying a spatial regression analysis on a sample constitute by 306 agri-food SMEs located in two municipalities with different economic characteristics: Murcia and Madrid. In addition, the authors applied the discounted cash flow model in order to estimate the SMEs’ economic value.FindingsThe findings show the importance of the geography variables on the SMEs’ performances highlights interesting differences between territories. In particular, the results confirm that the geographical proximity between agri-food firms and between them and external agents is significant on firms’ valuations. The agglomeration effects are verified in both municipality but the density variable present a negative non-linear effect confirming previous studies which indicates that the existence of a large number of firms 05 rise competition, decreasing the economic opportunities of these companies.Originality/valueThis study gives interesting insights to policymakers, researchers and practitioners concerning the importance of the relationships among agents, also favoured by a developed infrastructures system in a fully connected environment.

Pendalaman Materi: Laporan Keuangan sebagai Dasar Analisis Investasi Saham

This community service activities aims to deepen public understanding in making financial records and reporting correctly and making the financial statements as a basis for investment analysi. The investment analysis method used is a discounted cash flow model to determine whether the investment is undervalued or overvalued. The community in this activity are students of SMK Bina Nasional Informatika, North Cikarang. The implementation phase of this activity includes a field survey, coordination with the school principal, the implementation of a financial report socialization program as a basis for stock investment analysis, and preparation of the report. The socialization activity went smoothly attended by 28 Accounting students in class XII. Socialization participants seemed enthusiastic about the material provided. This can be seen from the beginning to the end of the event, all participants followed well. Based on the results of interviews, questions and answers and direct observations, community service activities have increased the knowledge of students by as much as 80% about how to prepare good financial statements and conduct stock valuations using financial statements.

Discount Rate Uncertainty and Capital Investment

Firms obtain noisy estimates of investors' required rates of return (discount rates) using market-based information. Discounted-cash-flow (DCF) methods, as commonly taught in MBA courses, lead to upward-biased estimates of project values in the presence of such noise, even when cash flow and discount rate estimates are unbiased, due to Jensen's inequality. We show that this bias affects corporate investment decisions and firm financial performance, and we test additional predictions derived from the DCF model in the presence of noisy discount rates. Our evidence implies that a one-standard-deviation increase in discount rate uncertainty is associated with increased firm investment of 6.8%, while profitability decreases by 4.1%.

Research on Quantitative Evaluation Model of Investment Value of Power Grid Enterprises’ New Business Based on Real Options

With the continuous advancement of the power system reform, especially after the introduction of equipment capital to participate in the competition, the business development of power grid companies is facing increasingly severe internal and external tests. While continuing to do a good job in regulated businesses centered on transmission and distribution business, vigorously develop new businesses and strive to achieve high-quality development in a complex market environment. Through the evaluation of the intrinsic value of new businesses of power grid companies, investors can clarify the true value of new businesses, better identify and avoid potential risks, and encourage investors to invest rationally. This article first expounds the types of new businesses of power grid companies, introduces the basic overview of real option theory, and constructs a value evaluation model of discounted cash flow model plus real option theory pricing model, and through case analysis, the feasibility of empirical option theory in the evaluation of new business of power grid investment value is verified.

Uber Future Value Prediction Using Discounted Cash Flow Model

It is important to make a reasonable valuation of a company. A good valuation can make a difference in lots of aspects. In this research, the purpose of predicting valuation of Uber is to gain the future free cash flow and stock value of it, so that we can provide information for its future development strategy and put forward feasible business decisions, and then improve the future value of it. What’s more, we hope to use the information of Uber’s valuation to make investment analysis, understand its advantages and disadvantages, and help investors make better decisions. The reason why we choose Uber as a research object because it is a growing company that needs the right strategy and a lot of investments. Making valuation of Uber can help it attract investment and make stratagem. We use the discounted cash flow model to value Uber. We estimate the company’s income, expenditure, free cash flow and equity beta in the future by investigating and studying its data in recent three years and the data of a peer group. Finally, we get Uber’s optimistic price, pessimistic price and target price. All of the prices are higher than the present price which means it has a good development prospect and be good for investing.

Opciones reales y el valor de los ahorros fiscales

En la versión tradicional del modelo de descuento de flujos de fondo, no son considerados los valores contingentes de ahorros fiscales, suponiendo, por el contrario, valores determinísticos para escudos fiscales. En tal sentido el trabajo propone un modelo que incorpore la naturaleza contingente de los ahorros fiscales, relacionado con el grado de apalancamiento y resultados esperados. Empleando la Teoría de Opciones como base, es desarrollado el modelo de valuación de ahorros fiscales. Seguidamente, mediante el análisis de caso y sensibilidad de resultados, se alcanzan los principales resultados. Se evidencia la naturaleza contingente de los ahorros fiscales en el valor de la firma, evitando el debate sobre tasas de interés de escudos fiscales.

Real Option Valuation with Stochastic Interest Rate and Stochastic Volatility

Abstract. Real options are one of the most interesting research topics in Finance since 1977 Stewart C. Myers from MIT Sloan School of Management published his pioneering article on this subject in the Journal of Financial Economics. Real options are techniques for supporting capital budgeting decisions that adapt techniques developed for financial securities options. The purpose of using this real option is to capture the options contained in projects that cannot be captured by the discounted cash flow model which operates as a basic framework for almost all financial analyzes. The process of valuing real options will be complemented by the stochastic interest rate and stochastic volatility to better capture the flexibility and volatility of the existing economic and financial situation. The valuation will use a Monte Carlo simulation with the MATLAB programming language on crude oil data from the North Sea oil field. Data were obtained from the thesis of Charlie Grafström and Leo Lundquist with the title "Real Option Valuation vs. DCF Evaluation – An Application to a North Sea oilfield".Keyword: real options, stochastic interest rate model, stochastic volatility model, simulation

Have investors learned from the crisis? An analysis of post-crisis pricing errors and market corrections in US stock markets based on the reverse DCF model

ABSTRACTThe traditional discounted cash flow (DCF) model is generally used to estimate the present value of an enterprise or its equity based on expected future parameters such as cash flows, growth rate and discount rate. In the last decade, the reverse DCF model has gained popularity. With this approach, the valuer uses the current market capitalization as a fixed input and seeks those ‘critical’ values of individual valuation parameters, which – assuming all other parameters remain unchanged – result in a value equal to current market value. This provides a point of comparison for the company’s realized performance and may provide insights regarding over or undervaluation. In this study, we develop a novel DCF model and conduct empirical analysis using data of 1001 US manufacturing, service, retail and financial companies. We examine pricing errors and market corrections in the post-crisis era based on the critical cash flow ratio defined in our reverse model. We find evidence of a general undervaluation in US stock markets with different pricing error patterns across industries. Our results confirm market correction mechanisms have worked properly in the post-crisis era with an average reaction time of 2 years, suggesting investors have learned from the crisis.

Company life cycle models and business valuation

Future free cash flow is a crucial element of most business valuation tools, such as the Discounted Cash Flow model, with the quality of the valuation depending heavily on its forecast accuracy. This paper explores the theory on business life cycle (and growth) models in an aim to improve that quality. Life cycle and growth models have been studied in the management and organization literature for decades, but the relevant aspects from a business valuation perspective remain unclear. Reviewing the existing literature, we argue that the five-stage Hanks model (Start-up, Growth, Maturity, Diversification, and Decline) is applicable for valuation purposes. We further argue that life cycle thinking provides useful insights for making grounded assumptions in predicting the future free cash flows and residual value of a company. This paper presents practical valuation approaches and insights for each of the five stages of the Hanks model.

Financial risks in Rwandan smallholder broiler production

Purpose The purpose of this paper is to determine the stochastic net present value (NPV) of a model smallholder poultry operation in Rwanda under production and market uncertainty. Design/methodology/approach A discounted cash flow calculator was used to determine the NPV of operator investments and operating cash flows, including time, materials and capital. Broiler production data, market prices and variable input costs were collected from 125 smallholder operations in the Musanze District, Rwanda. These data were combined with a historical price index tracking the inflation rate of Rwanda’s currency. Policies including overstocking, technical support repayment scheduling, selling broilers at a spot market price, using marketing contracts and selling poultry manure were compared using non-parametric paired comparisons and stochastic dominance. Findings Risk-neutral and risk-averse producers would prefer overstocking, delaying repayment of technical support services and selling manure to status quo operational policy. No differences were observed between the option to sell birds at spot market prices or through contracts. Research limitations/implications This analysis demonstrates how individual managerial or an intervention in smallholder broiler production affects financial performance. Practical implications To mitigate risk associated with this novel enterprise, producers should consider overstocking birds. If local markets for manure were developed, the risks faced by new or beginning poultry operators could be mitigated. Originality/value A stochastic, discounted cash flow model calculator was used to determine the NPV and discounted payback period of operator investments and operating cash flows, including time, materials and capital.

Economical Feasibility of Rare Earth Mining outside China

Although rare earth deposits are found on all continents, China produces more than 90% of all globally used rare earth metals. Besides its economic dominance, China has also gained a monopolistic know how position in Rare Earth Elements process technologies. Based on China’s dominant position in rare earth markets, other countries such as the USA, Australia, Europe and Japan are increasingly concerned about a stable rare earth supply and their increasing dependence on China. In 2019 the new trade conflict blazed up between China and the U.S., and the threat of China to decrease or even stop rare earth supply to the U.S. is a new chapter in the trade war which shows that new means of supply must be found. The main focus of this paper is to evaluate and compare advanced rare earth projects outside China with a new holistic and objective method to get a detailed picture of possible rare earth mining outside China. In addition to the exclusively economic investigation, specific countries’ risk und price development scenarios are considered. This leads to an objective picture of rare earth mining outside of China, which is needed as a basis for discussions of secure rare earth supply for the western world. Building on this objective economic analysis, we can also add new supply risk due to new political situations. To this end, data is compiled on 14 selected focus projects with regard to the required investments, operating costs, and the potential revenues for each case. These data are used to develop a discounted cash flow model (with analogous assumptions and methods) for each project. This model enables the achievable net present value (NPV), the internal interest rate, and the static amortization period for each project to be determined.

The inclusion of <i>Leucaena diversifolia</i> in a Colombian beef cattle production system: An economic perspective

Keynote paper presented at the International Leucaena Conference, 1‒3 November 2018, Brisbane, Queensland, Australia.Despite the great potential of legumes in cattle production, their adoption and use throughout the tropical world remain limited. While this is largely attributed to factors such as limited knowledge or access to credit, lack of information on the viability and profitability of the technology can influence the adoption decision. The objective of this study is to evaluate the profitability of including Leucaena diversifolia, accession ILRI 15551 in a Colombian beef cattle production system. For this purpose, we use data from a grazing experiment comparing a grass-legume association (Brachiaria hybrid cv. Cayman and L. diversifolia) with a grass monoculture (cv. Cayman) in the Valle del Cauca department, both with the purpose of beef production. We use a discounted cash flow model, developed with the simulation software @Risk, which considers inherent risk and uncertainty factors in these types of rural investment projects, under three different pasture degradation scenarios. The results indicate that the inclusion of L. diversifolia is financially profitable and substantially improves the associated risk and performance indicators. Profitability indicators increased in a range of 15‒110%, and the probability of suffering economic losses decreased from 72% to 0%. The results were directly related to the increases in animal productivity (49%) and efficiency resulting from including the legume. This work shows that L. diversifolia has significant potential to increase both animal production and profitability, which is conducive to the sustainable intensification of beef production in grazing systems.

A comprehensive cost-benefit analysis of the penetration of Smart Grid technologies in the Saudi Arabian electricity infrastructure

The study proposes an economic framework based on detailed cost-benefit analysis of the insertion of Smart Grid technologies for electricity infrastructure modernization. The framework maps Smart Grid assets to their functions and benefits to estimate the feasibility of each Smart Grid technology and infrastructure. Net present value and discounted cash flow models, benefit/cost ratio, and minimum total cost are included in the analysis. The framework is applied to the Saudi electricity infrastructure as a case study. The framework is a comprehensive approach for economic analysis adapted from the EPRI Smart Grid model, the NETL modern grid initiative, and a study conducted by CESI and A.T. Kearney to estimate the impact of smart meters and smart equipment on the Saudi electric grid. Our findings show that advanced asset management infrastructure technologies are the most profitable technologies for the Saudi electricity infrastructure, followed by advanced distribution operations technologies, advanced transmission operations technologies, and advanced metering infrastructure technologies.

Private sector-owned mini-grids and rural electrification: A case study of wind-power in Kenya's tea industry

We use a discounted cash flow model to explore the impact of electricity pricing and cost sharing rules on the economics of a small wind-powered mini-grid project in Kenya, designed around local tea factories as a demand anchor and connected to the national grid. The results show that including rural domestic and small business consumers in the project increases the overall economic benefit, illustrating the potential gains from using the tea factories as a demand anchor. However, the results also demonstrate that how costs are allocated to different consumer types impacts on participation and on whether the full benefits could be attained. If all consumers must pay towards the infrastructure they use according to their consumption, domestic consumers with low energy demands would not join the mini-grid. Cost sharing rules can be designed where tea factories, small businesses and domestic consumers all individually benefit and would therefore have incentives to participate. However, when the mini-grid is owned by the tea factories there are also possible outcomes where they might prefer to exclude domestic consumers. The results emphasise the need for policy makers to consider appropriate mini-grid tariffing regulation and how these tariffs interact with any existing national electricity pricing systems.

Foundations of ESG Investing: How ESG Affects Equity Valuation, Risk, and Performance

Many studies have focused on the relationship between companies with strong environmental, social, and governance (ESG) characteristics and corporate financial performance. However, these have often struggled to show that positive correlations—when produced—can in fact explain the behavior. The authors of this article provide a link between ESG information and the valuation and performance of companies, by examining three transmission channels within a standard discounted cash flow model—which they call the cash-flow channel, the idiosyncratic risk channel, and the valuation channel. They tested each of these transmission channels using Morgan Stanley Capital International ESG Ratings data and financial variables. This showed that companies’ ESG information was transmitted to their valuation and performance, both through their systematic risk profile (lower costs of capital and higher valuations) and their idiosyncratic risk profile (higher profitability and lower exposures to tail risk). The research suggests that changes in a company’s ESG characteristics may be a useful financial indicator. ESG ratings may also be suitable for integration into policy benchmarks and financial analyses. TOPICS: ESG investing, security analysis and valuation, risk management

The Discounted Cash Flow Terminal Value Model As an Investment Strategy

To determine a company’s intrinsic value, equity analysts make forecasts several years into the future, although the value generated in the explicit forecast period only represents a small part of the total valuation. Instead, most of a company’s value is determined in the terminal period - a perpetuity that includes all years after the explicit forecast. The literature states that the forecasts of analysts are too optimistic, and their assumptions in the terminal period does not reflect a normalized level in the company’s business cycle. This thesis develops several investment strategies based on estimates of the terminal value by using past financials with the goal of eliminating optimism and bias. Our valuations utilize the Gordon Growth and value driver formulas – both of which are commonly used in discounted cash flow models. We present several variations to estimate the fundamental components in the two formulas and test whether these variations are robust. The strategies are applied to the 727 non-financial stocks that have been a part of the S&P 500 index from 2003 to 2018. The results are benchmarked against the index and the performance of stock recommendations from Morningstar’s independent equity analysts. By investing in stocks trading below their terminal value, the strategies produce average annualized returns between 12.6% and 17.6% in excess of the risk-free rate, while the S&P 500 index excluding financials has generated 12.5% annualized. A portfolio of 4- and 5-star rated stocks gave 13.1% yearly but with a relatively higher risk. The Gordon Growth and value driver strategies have similar returns and risk, but an important finding is that they invest in stocks with very different characteristics. The Gordon Growth strategy invests in stocks that appear cheap on price multiples and have higher debt, lower margins, and lower returns on invested capital. In contrast, the value driver strategy invests in cheap stocks with higher quality on these parameters. Both strategies favour stocks in the healthcare and consumer defensive sectors but often find technology stocks to be overvalued. If the strategies are used to both buy cheap and short-sell expensive stocks, they continue to deliver strong risk-adjusted returns, but the different variations of the strategies are less consistent – particularly the value driver strategies. The results are robust across many variations of the Gordon Growth and value driver strategies, but if the assumptions to growth and discount rates become too conservative, the amount of undervalued stocks is reduced, which makes the strategies more concentrated and riskier. The discount rate also has significant influence on which sectors appear most attractive. The results indicate, that our strategies represent a better alternative to the traditional quantitative value factor of Fama & French that evaluates stocks on their book-to-market ratios. The value factor has performed poorly in the past decade and appear redundant in the face of more recent factors of profitability and investment.

A financial model for lithium-ion storage in a photovoltaic and biogas energy system

Electrical energy storage (EES) such as lithium-ion (Li-ion) batteries can reduce curtailment of renewables, maximizing renewable utilization by storing surplus electricity. Several techno-economic analyses have been performed on EES, but few have investigated the financial performance. This paper presents a state-of-the-art financial model obtaining novel and significative financial and economics results when applied to Li-ion EES. This work is a significant step forward since traditional analysis on EES are based on oversimplified and unrealistic economic models. A discounted cash flow model for the Li-ion EES is introduced and applied to examine the financial performance of three EES operating scenarios. Real-life solar irradiance, load, and retail electricity price data from Kenya are used to develop a set of case studies. The EES is coupled with photovoltaics and an anaerobic digestion biogas power plant. The results show the impact of capital cost: the Li-ion project is unprofitable in Kenya with a capital cost of 1500 $/kWh, but is profitable at 200 $/kWh. The study shows that the EES will generate a higher profit if it is cycled more frequently (hence a higher lifetime electricity output) although the lifetime is reduced due to degradation.

Model risk regarding monthly wind energy production for the valuation of a wind farm investment

PurposeThe purpose of this paper is to assess model risk with regard to wind energy output in monthly cash flow models for the purpose of valuation and risk assessment of wind farm investments, where only a few approaches exist in the literature.Design/methodology/approachThis paper focuses on the risk-return characteristics of this investment from the perspective of private and institutional investors and takes into account several risks, in particular the resource risk related to the uncertainty of the monthly wind energy produced. To this end, this paper presents different approaches for modeling monthly wind power output and assesses the impact of three selected models with different properties on the investment’s risk-return characteristics by means of a stochastic discounted cash flow model. In addition, the model considers the possibility of a joint operation of the wind farm with a pumped hydro storage system to reduce risk and improve profits.FindingsThe results show that the (non-)consideration of seasonality of the monthly wind energy produced considerably influences the risk-return characteristics, but that principal developments dependent on input parameters and model variables remain similar.Originality/valueThis paper contributes to the literature by presenting different approaches for modeling the monthly wind energy produced based on direct models of the wind energy output, which are rare in the existing literature. Further, their impact on risk-return characteristics of a wind farm investment is analyzed, and thus, related model risk is assessed.

Single-Tier or Dual-Tier Tax Systems: Implication for Petroleum Project Economics in Nigeria

Summary In this work we evaluate the effects of the single-tier tax system (STS) at its current rate in comparison to the proposed dual-tier tax system (DTS) in the National Petroleum Fiscal Policy in Nigeria on project economic performance. We also expound on the arguments between two schools of thought (single tax and dual tax proponents) toward understanding the rationale underlying the divergent viewpoints. The methodological approach applies the discounted cash flow modeling framework to evaluate the performances of terrain-based projects using selected metrics, such as internal rate of return, discounted payout, net present value, and government take (GT) under the two tax systems. This approach calibrates the unit technical cost for typical deepwater projects in Nigeria and imposes the current and proposed fiscal terms. Varying cost treatment options and alternative allowables//incentives are investigated in the modeling framework using global best practices. We conclude that whichever tax system is adopted, it is possible to achieve equivalent economic metrics. However, the DTS presents a better, more flexible option over the STS because one of the split rates—especially the hydrocarbon resource tax—could serve as an instrument to incentivize investment, promote conservation, and expand the resource base through technology innovation more easily without denying the mineral owner an outright revenue through taxation. In a classical case such as Nigeria, in which the national fiscal budget is largely financed using hydrocarbon revenue, the DTS seemingly offers a better option for revenue sharing among the stakeholders—the resource owners and the Federal Government—than the current single upstream tax system. Our discussion in this paper bridges the gap between the divergent viewpoints on the taxation system in Nigeria by proffering a pathway. We suggest that the overall objectives of stakeholders could be achieved using either STS or DTS metrics if the mechanics in designing the fiscal system is better understood. This will lead to progressive application in achieving divergent expectations.

Evaluating Ancillary Business Scale for PPP-BOT Projects: A Social Housing BOT Case in Taiwan

Due to budgetary constraints, the government releases the right to ancillary business development for private investors to increase profits in PPP projects. However, the ancillary business scale is not specified in the regulations, and there is little relevant research on modeling the scale. Thus, our research aims to create a model with mathematical analysis to evaluate the ancillary business scale. The model is constructed based on the discounted cash flow model to calculate the ancillary business scale attracting private investors with a case study of a social housing project. For this case, the calculated ancillary business minimum scale (ratio of ancillary business to project in total floor area) based on the 7-year (2009–2016) and 17-year (2000–2016) data are 30.81% and 52.79%, respectively; neither is able to meet the scale listed in the tender condition regulated by the government, i.e., 25%. Moreover, this study performs a sensitivity analysis on the expected rate of return and rent discount of the case. The government needs to raise the proportion of ancillary businesses or to increase the rent of social housing to successfully attract private investors.