Cash Flow Estimates Research Articles

New Proposal on Reporting Intangible Resources on the Organizational Level

Abstract In recent years, it has become increasingly evident that existing information systems at the level of organizations do not allow for a performing management because they fail to capture a wide range of intangible resources, which represent one of the most important variables for the success and progress of any organization. As a result of the fact that the annual financial reporting cannot give a real basis for making accurate estimates of future cash flows that can be made by organizations, or of their associated risk, this article states the need to report intangible resources at the organizational level. The concept, content and advantages of an Intangible Resources Report (IRR) are presented, and in the final part of the article it is presented an example of IRR, detailed in a specific case for an intangible resource. This Intangible Resources Report has the advantage of providing a generous and documented framework for managing and disclosing intangible resource information for any type of organization. Through its implementation, it is possible to compare strengths and weaknesses in intangible resources for different organizations, becoming a good benchmark tool, thus facilitating the exchange of experience and learning in different areas of intangible resource management at the level organizations

An Assessment of Cash Flow Manipulation as a Form of Real Activities Manipulations among Quoted Companies in Nigeria

The study examined the prevalence of cash flow manipulations as a form of real activities manipulations in the quoted companies in Nigeria between 200 and 2010. The study makes use of 71 quoted companies in Nigeria and cash flow from operations model is specified as function of current sales and change in current sales. The residual of the estimated cash flow model is the abnormal cash flow which represents the proxy for real activities manipulations. The method of analysis adopted is the pool regression model. The estimated model shows that both sales and current sales levels of the firms are very important determining factor of cash flow and hence the low levels of abnormal cash flow which signifies prevalence of real activities manipulations in among the quoted companies in Nigeria. It is therefore recommended that relevant bodies like the audit committee will have to pay more attention to the cash flow process of these quoted firms since the study has shown that cash flow from operations of these firms are highly subjected to manipulations.

주택연금 유동화증권에 관한 연구 : 구조설계 및 예상현금흐름 분석을 중심으로

주택연금 유동화증권에 관한 연구 : 구조설계 및 예상현금흐름 분석을 중심으로

Валовой национальный продукт и боги. Как экономическая культура влияет на формы капитализма

The variety of forms that capitalism takes are deeply conditioned by the of the societies in which it operates SCHOLARS MAY DISAGREE about why Jesus drove the money-changers from the Temple. But few would question the reality of the tension, implicit in that famous scene, between economics and culture, especially religious -- the beliefs, values, and orientations toward life through which people organize their existence, search for meaning, and define who they are. Fewer still would argue that actually determines behavior in today's industrial societies. (Some anthropologists do, of course, hold such views regarding pre- or non-modern societies, but that is a different matter.) By contrast, numerous economists assert that, since we are actors in affairs, we must be comparably rational in the other areas of our lives. This naturally leads me to wonder why people who have been so remarkably unsuccessful in clarifying, let alone predicting, the workings of the marketplace should be trusted to shape our common interpretations of politics or social life.(1) Attempts to explain the dynamics of Wall Street in theological terms have been unpersuasive at best; so, too, efforts to provide a strict explanation for events like the Iranian revolution. For all practical purposes, therefore, the gulf separating markets from sanctuaries and rationality from morals -- that is, the gulf between the gross national product and the gods -- remains as wide as it was in biblical times. The idea of Must this always be so? Is there no navigable middle course between culturalism (where beliefs and values are supposed to explain everything) and economism (where politicians, spouses, and Islamic revolutionaries are all assumed to act in accordance with the logic of investment bankers)? Common sense says there is: a perspective focused on what I call economic culture -- the social and cultural context of behavior.(2) Such a view of things does not assume that determines economics or economics culture. It assumes only that human beings exist in society and that this context, with its baggage of cultural attitudes and habits, affects behavior and is in turn affected by it in ways that must be studied empirically, case-by-case on the ground. No matter how much the same capitalist rationality may animate managers from different cultural backgrounds, those differences are not -- and cannot be -- left conveniently in the cloakroom before discussions or negotiations start. Indeed, they often have as telling an effect on the outcome of such sessions -- albeit in a different way -- as do cash flow projections or estimates of market size. A question of advantage Variations in matter. In particular settings, they can provide the basis for what my colleagues and I have come to think of as comparative cultural advantage. For historical reasons, to cite one example, modern Japanese capitalism has been more successful than its American counterpart in building large organizations that command intense, sometimes passionate loyalty from their members. Arguably, this has provided Japanese companies a culture-based source of competitive advantage. Now, this does not mean that the Japanese are always successful in this way or that Americans can never be. It means only that, comparatively, the cultural baggage that the Japanese bring with them into the arena is differentially helpful in this particular aspect of organization-building. This has, however, a further implication: what may be helpful at one time may be a handicap at another. The cultural constellation of loyalty and conformism (what the Japanese call groupism), which helped create the manufacturing achievements that have been scaring the wits out of Americans and Europeans for so many years, may be much less helpful -- may indeed be a source of comparative disadvantage -- in a post-industrial era of high technology and information-driven services. …

Selecting appropriate operations strategy using project management concepts: an economic analysis approach

Having an effective operations strategy (OS) is a key element in protecting competitive capabilities of any company. OS supports the business strategy and should be accurately selected in a way that the organisation can be positioned among the competitors. The main objective of this study is to provide valuable insights for project managers to select the most appropriate OS for their enterprise using economic analysis approach. We propose a seven-step algorithm which makes the decision-makers able to make an optimum decision for organisation's OS selection on the basis of economic analysis of OS alternatives. This is the first study which presents such an OS selection framework and incorporates project management and OS contents. First we consider each OS alternative as a program (a group of projects) and define some group of projects for actions required in intersections of OS matrix related to each program. Then, by determining the dependencies among the projects of each program as well as providing some information about the projects, we can estimate cash flows of programs. Thus, we can financially evaluate the programs and select the most profitable and appropriate OS. The presented algorithm assists the managers to apply the most financially effective OS for their company. The validity of the algorithm is demonstrated through conducting a case study.

Selecting appropriate operations strategy using project management concepts: an economic analysis approach

Having an effective operations strategy (OS) is a key element in protecting competitive capabilities of any company. OS supports the business strategy and should be accurately selected in a way that the organisation can be positioned among the competitors. The main objective of this study is to provide valuable insights for project managers to select the most appropriate OS for their enterprise using economic analysis approach. We propose a seven-step algorithm which makes the decision-makers able to make an optimum decision for organisation's OS selection on the basis of economic analysis of OS alternatives. This is the first study which presents such an OS selection framework and incorporates project management and OS contents. First we consider each OS alternative as a program (a group of projects) and define some group of projects for actions required in intersections of OS matrix related to each program. Then, by determining the dependencies among the projects of each program as well as providing some information about the projects, we can estimate cash flows of programs. Thus, we can financially evaluate the programs and select the most profitable and appropriate OS. The presented algorithm assists the managers to apply the most financially effective OS for their company. The validity of the algorithm is demonstrated through conducting a case study.

Сравнение лизинга и кредита с использованием CIR-модели

In the implementation of capital investment in the modernization
 of enterprise production management it is important to
 make an informed decision about choosing a source of financing
 for such investments. One of the most common sources of financing
 is the long-term bank loan and leasing. To substantiate the
 choice of one of these sources it is necessary to determine the most
 effective of them, that is, given that the effectiveness of the project
 does not depend on the method of financing, the cash flow of that
 will be more attractive. In this article, the author builds two models
 of cash flow estimates arising from the implementation of the project
 financing each of these methods. The first model is a classic
 calculation of NPV, and the second model is developed by the author
 based on the zero-coupon bonds stochastic valuation model
 of Cox-Ingersoll-Ross.

Cash conversion cycle and value-enhancing operations: Theory and evidence for a free lunch

The empirical literature shows that firms overinvest in working capital and that these investments are economically inefficient. We decompose working capital investments in the cash conversion cycle and growth effects in the presence of x-inefficiency. We predict that reductions in the cash conversion cycle should increase shareholder value. Direct evidence follows from a case study of a listed company in Brazil, MRV. Changes in operations reduced CCC from 508days in 2012 to 351days in 2015, decreasing working capital requirements by US $1.02 billion. Indirect evidence comes from (1) a synthetic control comparing MRV's free cash flow to equity to its direct and distant competitors; (2) an event study of share prices, and (3) a dynamic cash flow estimation using Tobin's Q as the dependent variable. Outcomes suggest that CCC management, controlling for effects on operating margins, result in higher stock prices and profitability, and increased cash flow. The theoretical framework and results reconcile the literature and provide a rationale for the overinvestment and the inefficiency of working capital investments.

Petroleum Property Income and Market Valuation Approaches (Transactions Beware!)

Characteristics exhibited by producing liquid-rich shale formations often cause inaccurate forecasts of natural gas and oil production when multistage hydraulic fracking is used for extraction. Poor cash flow estimates can be avoided by practicing due diligence when appraising petroleum property value and income. Due diligence is satisfied by comparing volumes recorded on actual royalty check stubs or monthly statements to state-reported production volumes, by relying on petroleum reserve appraisals instead of transaction multipliers or rules of thumb, and by using nearby analog wells in proximity found in subscription databases for good “type” well decline curves. In addition, properly referencing the contributing work of other appraisers, maps, and analyses improves understanding and reduces errors.

Usec Inc.

This case is designed to present students with the challenges of formulating a discounted-cash-flow (DCF) analysis for a strategically important capital-investment decision. Analytically, the problem is representative of most corporate investment decisions, but it is particularly interesting because of the massive size of the American Centrifuge Project and the potential of the project to significantly affect the stock price. Students must determine the relevant cash flows, paying close attention to the treatment of input costs, selling prices, timing of investment outlays, depreciation, and inflation. An important input is the appropriate cost of uranium, which some students argue should be included at book value, while others argue that market value should be used. Although the primary objective of the case is to focus on the estimation of cash flows, students are provided with a straightforward set of inputs to estimate USEC's weighted average cost of capital. The case is designed for students who are learning, or need a refresher on, DCF analysis. Because of the basic issues covered, the case works well with undergraduate, MBA, and executive-education audiences. The case also affords the opportunity to explore a variety of issues related to capital-investment analysis, including relevant costs, incremental analysis, cost of capital, and sensitivity analysis. The case is an excellent example of the value of a firm as the value of assets in place plus the net present value of future growth opportunities.

Capital Budgeting Practices: State of the Art

The purpose of this review paper is to investigate the current state of the art of capital budgeting practices, across countries, determinants influencing capital budgeting practice; and providing future research agenda. The published studies were identified and retrieved using electronic databases accessible through the author's university library system using search parameter and screened against explicit inclusion and exclusion criteria. Thematic analysis was applied to analyze them. Results reveal that project identification, cash-flow estimation and post-audit stage still remains relatively less explored and requires focused in-depth survey investigation. Increased use of DCF techniques (mainly IRR and NPV) along with PB is found in both developed and developing countries for evaluating capital investment projects. Application of real option has gained popularity in last two decades. Risk analysis has become more sophisticated in recent time and increased use of sensitivity and scenario analysis was found for risk assessment. Determinants influencing capital budgeting practices explained the “WHY” of capital budgeting practices. Present work updates the literature, fills the gap in literature by increasing scope and coverage of articles and provide basis for further research.

The Economic Consequences Associated with Integrated Report Quality: Capital Market and Real Effects

We examine whether integrated report quality (IRQ) is associated with stock liquidity, firm value, expected future cash flows, and cost of capital. Our study is motivated by the recent focus on sustainable capitalism and the global interest shown by firms, investors, and regulators in integrated reporting. We use data from South Africa because it is the only country where integrated reporting is mandatory. We use a measure of IRQ based on proprietary data from EY, which rates these reports as part of its Excellence in Integrated Reporting Awards. We find that IRQ is positively associated with stock liquidity, measured using bid-ask spreads, and firm value, measured using Tobin’s Q. Our results are consistent whether we analyze levels or changes. When we decompose the firm value into an expected future cash flows effect and a cost of capital effect, we find that the positive association between IRQ and firm value is attributable mainly to the cash flows effect, which is consistent with investors revising estimates of future cash flows upward as a result of better understanding the firm’s capitals and strategy or future cash flows increasing because of improved internal decision making. We provide evidence on these two explanations and find it is more likely that our results are attributable to improved decision making by managers than to analysts forecasting future cash flows more accurately.

943-945 Warren Road

This case, intended for MBA and executive education audiences, investigates whether an LLC should invest in a real estate deal. The materials provide a straightforward opportunity for applying discounted-cash-flow methods from the perspective of equity investors in the LLC. The investors know the terms of interest and principal payments on planned debt financing and have made forecasts of rental rates, occupancy, depreciation, future sale price, various expenses, and other items related to the property. The case can be used as an introduction to estimation and analysis of cash flows to the suppliers of equity. The setting provides opportunities for discussion of tax issues and risks. Excerpt UVA-F-1638 May 11, 2011 943–945 Warren Road Mike Grant, Tom Hoffman, and Andy Krouse had created a limited liability company (LLC) for the purpose of owning real estate. They had considerable experience in real estate; their most recent deal involved purchasing a small apartment complex and converting it to condominiums. With that $ 5 million investment ($ 3 million to purchase the complex and$ 2 million for the conversion), they earned a 20% annual rate of return on their money over a three-year period. The LLC now owned 10 commercial properties throughout central Virginia. Grant, Hoffman, and Krouse were considering buying a small retail complex (approximately 14,000 square feet) located at 943–945 Warren Road in Charlottesville, Virginia. The estimated purchase price was $ 2.5 million, and they anticipated spending an additional $ 300,000 on renovations immediately after the purchase. The total investment would be approximately $ 2.8 million. They had a commitment from a local bank for a $ 2.175 million25-year mortgage at an interest rate of 7.25%, which they thought was attractive given current lending markets. Exhibit 1 shows the annual breakdown of mortgage payments by interest and principal over the life of the loan. They needed to decide quickly whether to pursue the deal. 943–945 Warren Road . . .

Are Cash Flows Better Stock Return Predictors Than Profits?

Although various income statement–based measures predict the cross section of stock returns, direct method cash flow measures have even stronger predictive power. We transform indirect method cash flow statements into disaggregated and more direct estimates of cash flows from operations and other sources and form portfolios on the basis of these measures. Stocks in the highest-cash-flow decile outperform those in the lowest by over 10% annually (risk adjusted). Our results are robust to investment horizons and across risk factors and sector controls. We also show that, in addition to operating cash flow information, cash taxes and capital expenditures provide incremental predictive power.

Earnings Versus Cash Flows: The Valuation Perspective

This paper is an effort to compare the earnings based and cash flow based methods of valuation of an enterprise. The theoretically equivalent methods based on either earnings such as Residual Earnings Model (REM), Abnormal Earnings Growth Model (AEGM), Residual Operating Income Method (ReOIM), Abnormal Operating Income Growth Model (AOIGM) and its extensions multipliers such as Price/Earnings Ratio, Price/Book Value Ratio; or cash flow based models such as Dividend Valuation Method (DVM) and Free Cash Flow method (FCFM) all provide different estimates of valuation of the Indian giant corporate Reliance India Limited (RIL). An ex-post analysis of published accounting and financial data for four financial years from 2008-09 to 2011-12 has been conducted. A comparison of these valuation estimates with the actual market capitalization of the company shows that the complex accounting based model AOIGM provides closest forecasts. These different estimates may be derived due to inconsistencies in discount rate, growth rates and the other forecasted variables. Although inputs for earnings based models may be available to the investor and analysts through published statements, precise estimation of free cash flows may be better undertaken by the internal management. The estimation of value from more stable parameters as Residual operating income and RNOA could be considered superior to the valuations from more volatile return on equity.

Modelling foreign exchange rate transaction exposure of UK insurance companies

Purpose The purpose of this paper is to study the sensitivity of foreign exchange exposure through the cash flow estimation method using a sample of 59 UK insurance companies. This approach allows a decomposition of exposures into short- and long-term components. By revealing the nature of their cash flow exposures, companies can evaluate the effectiveness of their hedging programmes and focus their hedging efforts according to the nature of their exposures. Design/methodology/approach Martin and Mauer’s (2003, 2005) three-stage model is used to estimate foreign exchange rate transaction exposures for the sample of 65 UK insurance companies over the period 2004-2013. However, this paper has one important innovation to this method. Instead of the model used in previous papers, the paper uses a model from the actuarial field that was proposed by Blum et al. (2001) for modelling foreign exchange rates with their relevant constituents (inflation and interest rate). Findings The evidence shows that the currency transaction exposure for non-life insurers is greater than that of life insurers. Moreover, the author finds that large insurers exhibit lower frequencies of foreign exchange transaction exposure than small insurers. Originality/value The value of this paper comes from the fact that revealing the nature of cash flow exposures, companies can evaluate the effectiveness of their hedging programmes and focus their hedging efforts according to the nature of their exposures.

Using managerial revenue and cost estimates to value early stage real option investments

Real options analysis is widely recognized as a superior method for valuing projects with managerial flexibilities. Yet, its adoption remains limited due to varied difficulties in its implementation. In this work, a real options approach that utilizes managerial cash-flow estimates to value early stage project investments is proposed. Our model is based on the assumption that managers can provide pessimistic, likely and optimistic sales and gross margin percent estimates. A market sector indicator is introduced, which is assumed to be correlated to a tradeable market index, which drives the project’s sales estimates. Another indicator, assumed partially correlated to the sales indicator drives the gross margin percent estimates. In this way a cash-flow process can be modelled that is partially correlated to a traded market index. This provides the mechanism for valuing real options of the cash-flow in a financially consistent manner. The method requires minimal subjective input of model parameters and is very easy to implement, based on simple managerial estimates.

Estimating Sustainable Normalized Operating Free Cash Flow

This note discusses the choices involved in estimating sustainable normalized operating free cash flow, which is the single most important driver of enterprise value. Being able to make a well-justified estimate of sustainable free cash flow is a basic skill in enterprise valuation. Heinz in 2012 and BP in 2016 are used as illustrations.

Minimum economic field size estimation and its role in exploration project risks assessment: evaluation of different methodologies

The E&P business is most often rife with risks and uncertainties. The capability of recognizing and quantifying these uncertainties and associated risks are the key to success. For consistent exploration project risk analysis, a standard discounted cash-flow approach, combining the geological risk, Minimum Economic Field Size (MEFS), resource size distribution, development cost, rate streams, commodity price, discount rate and cash flow estimation, has been used. This task requires highly skilled geoscientists, reservoir, facility, drilling engineers and economists to estimate field development costs, generate the economic indicator to rank the exploratory prospects’ potential success and to support the informed business investment decisions. The ‘Exploration Success’ contains two main variables: (1) Probability of geologic success (Pg), and (2) Probability of economic success (Pe). To remove sub-economic volumes from the volumetric distribution, the industry uses the estimation of minimum required (break-even) resources for the full project life-cycle, considering the most likely development scenario in exploration projects. For appraisal and pre-development projects, the minimum required resources are used to benchmark the confidence level of already discovered resources with their chance of success to be economically viable. Despite several contributions made in the past and available in the literature, to the best of the author’s knowledge, most often a deterministic MEFS value is being used for the exploration project risk assessment. This single MEFS value does not allow for the capturing of the risks associated with the different input parameters uncertainties, which are used for the MEFS estimation. Therefore, in this paper, we are reviewing and systematically describing the appropriate MEFS estimation methodology. The influence of key parameters has been analysed through an example, using different MEFS methods, to demonstrate their importance for MEFS estimation. The comparison of results allows clear judgmental insights into the problem and its related uncertainties, understanding and quantifying the exploration risks and hence the chance of overall economic success.

Net Operating Working Capital, Capital Budgeting, And Cash Budgets: A Teaching Example

Many introductory finance texts present information on the capital budgeting process, including estimation of project cash flows. Typically, estimation of project cash flows begins with a calculation of net income. Getting from net income to cash flows requires accounting for non-cash items such as depreciation. Also important is the effect of changes in net operating working capital on cash flow. While students readily understand how to account for depreciation when calculating cash flow, they typically have much more difficulty understanding how and why changes in working capital affect cash flows. This paper develops a teaching example to show exactly how and why changes in net operating working capital affect cash flows. The example shows how to derive operating cash flows for a proposed project using the accrual accounting method and then shows a cash budget for the same project. Finally, the example shows that the discrepancy between the cash flows shown in the cash budget and the operating cash flows can be resolved by accounting for changes in working capital. A survey of students in an MBA managerial finance course indicates student satisfaction with the teaching example and gives evidence that students prefer the teaching example to explanations of the effect of working capital on project cash flows given in the assigned text.