Opportunity Cost Of Funds Research Articles

The Effect of Profitability and Asset Structure to Capital Structure on Non-Bank Financial Institutions Listed On Indonesian Stock Exchange

One of the key decisions faced by financial managers in relation to company operations is funding decisions. The funding decision is seen from the capital structure, good capital structure is the optimal capital structure. The optimal capital structure is a condition in which a firm can use a combination of debt and equity ideally and balancing the value of the firm and the cost of its capital structure. The cost of capital arose is a direct consequence of the decision taken when the manager uses the debt in which there will be the capital cost of interest expense required by creditor. However, if the manager decides to use internal funds, an opportunity cost of funds will be incurred. This research that was used is quantitative data with financial data from the site Indonesian Stock Exchange. The companies that was used is Non-Bank Financial Institutions which published financial statements of the period 2014 – 2016. This research aims to know the effect of profitability and asset structure to capital structure on Non-Bank Financial Institutions Listed on Indonesian Stock Exchange. Analysis method that was used in this thesis is panel data regression with statistical software Views 7 Version. The sample was 30 companies by purpose sampling technique. The independent variables that used are profitability and asset structure, and the variable dependent is capital structure. The results show that profitability partially has insignificant negative effect on capital structure with value of -0.469. Asset structure partially has insignificant positive effect on capital structure with value of 0.945. Profitability and asset structure during 2014 – 2016 simultaneously has significant effect on capital structure on Non-Bank Financial Institutions with value of 0.018. The companies are expected to pay attention to profitability, as it increases profitability equally by increasing internal funding. The used of long term debt align with their firm size because debt will also have its effect to all operational aspect so that asset structure will become optimal.

Nonresident holdings of domestic debt in Nigeria: Internal or external driven?

AbstractThis paper studies the drivers of nonresident holdings of local currency debt in Nigeria. Using data over 2007M1–2019M1, we show that, on average, global factors (global interest rates, oil prices) seem to carry more weight than domestic factors (treasury bills rate and domestic risk) in foreign portfolio investors’ decisions in Nigeria. Specifically, we show that foreign participation is, in the long run, positively correlated with oil prices and profitable rates of return on local‐currency instruments, but negatively correlated with exchange rate depreciation pressures. In the short run, oil prices, opportunity cost of funds and perception of Nigeria‐specific risks also play a role. These results highlight the volatile short‐term nature of such flows and call for a package of policy reforms to attract longer‐term direct investments.

Non-Resident Holdings of Domestic Debt in Nigeria

Foreign holdings of domestic debt instruments in Nigeria have been increasing. Using data over 2007M1-2019M1, we show that, on average, global factors (global interest rates, oil prices) seem to carry more weight than domestic factors (treasury bills rate and domestic risk) in foreign portfolio invetsors’ decisions in Nigeria. Specifically, we show that foreign participation is, in the long run, positively correlated with oil prices and profitable rates of return on local-currency instruments, but negatively correlated with exchange rate depreciation pressures. In the short run, oil prices, opportunity cost of funds and perception of Nigeria-specific risks also play a role. These results highlight the volatile short-term nature of such flows and call for a package of policy reforms to attract longer term direct investments.

Non-Resident Holdings of Domestic Debt in Nigeria: Internal or External Driven?

Foreign holdings of domestic debt instruments in Nigeria have been increasing. Using data over 2007M1-2019M1, we show that, on average, global factors (global interest rates, oil prices) seem to carry more weight than domestic factors (treasury bills rate and domestic risk) in foreign portfolio invetsors' decisions in Nigeria. Specifically, we show that foreign participation is, in the long run, positively correlated with oil prices and profitable rates of return on local-currency instruments, but negatively correlated with exchange rate depreciation pressures. In the short run, oil prices, opportunity cost of funds and perception of Nigeria-specific risks also play a role. These results highlight the volatile short-term nature of such flows and call for a package of policy reforms to attract longer term direct investments.

Measuring the cost of capital in cooperative businesses

AbstractCooperatives usually cannot employ market‐based methods for valuating equity capital and must rely instead on accounting‐based methods. This paper assesses several approaches for valuating cooperative equity and suggests that the rate of return on equity is an appropriate measure of the opportunity cost of equity because it determines the levels of cash patronage refunds, equity retirement, and growth a cooperative can maintain. Simulations are used to explore the relationship between various measures and the rate of growth and demonstrate that the rate of return on equity is the only measure invariant with respect to changes in the growth rate. Calculations for US cooperatives show that the rate of return on equity results in a higher cost of equity than estimates based on the opportunity cost of funds and confirm that equity is more expensive than borrowed capital. A numerical example illustrates the early redemption of member equities at a discount.

An Economic Case for Prepaying your Mortgage

Households that already contribute sufficiently to tax-deferred retirement accounts often believe that the tax break from interest expense deduction is more beneficial than prepaying a mortgage. This idea stems from a faulty assumption regarding the appropriate opportunity cost of funds. This study covers a 26-year period and shows that prepayment is optimal for this type of household when correctly comparing the after-tax cost of the mortgage and the after-tax return of the risk-appropriate competing investment. The study illustrates that interest expense savings are greater than tax deduction benefits from 1990-2016 when prepaying 15-year and 30-year mortgages.

The total return to higher education: Is there underinvestment for economic growth and development?

The total return to higher education is the rate of return based on earnings plus non-monetary private and social benefits beyond earnings that captures higher education’s contribution to development. A theory of endogenous development is a new scholarly contribution where firm and household production with education externalities and the endogeneity of new ideas leads to an optimal rate of development. This rate is higher than in an economy without these externalities. Since measures of private non-market and social benefit externalities are positive, externalities contribute to higher per capita development. The total return is estimated to be considerably higher than the opportunity cost of funds and the return on physical capital, the first major evidence of serious underinvestment in higher education in the US for optimal development. Policy-relevant treatment effects and policy options with implications for optimal development and for improving the worsening condition of the dissatisfied middle class are considered.

The Case for Prepaying your Mortgage

Households that already contribute sufficiently to tax-deferred retirement accounts often believe that the tax break from interest expense deduction is more beneficial than prepaying a mortgage. This idea stems from a faulty assumption regarding the appropriate opportunity cost of funds. This study covers a 26-year period and shows that prepayment is optimal for this type of household when correctly comparing the after-tax cost of the mortgage and the after-tax return of the risk-appropriate competing investment. The study illustrates that interest expense savings are greater than tax deduction benefits from 1990-2016 when prepaying 15-year and 30-year mortgages.

Life-Cycle Earnings, Education Premiums, and Internal Rates of Return

What do the education premiums look like over the life cycle? What is the impact of schooling on lifetime earnings? How does the internal rate of return compare with opportunity cost of funds? To what extent do progressive taxes attenuate the incentives to invest in education? This paper exploits Norwegian population panel data with nearly career long earnings histories to answer these important questions. We provide a detailed picture of the causal relationship between schooling and earnings over the life cycle, following individuals over their working lifespan. To account for endogeneity of schooling, we apply three commonly used identification strategies. Our estimates show that additional schooling gives higher lifetime earnings and steeper age-earnings profile, in line with predictions from human capital theory. These estimates imply an internal rate of return of around 10 percent, after taking into account income taxes and earnings-related pension entitlements. Under standard conditions, this finding suggests it was financially profitable to take additional schooling because the rates of return were substantially higher than the market interest rates. By comparison, Mincer regressions understate substantially the rates of return. We explore the reasons for this downward bias, finding that it is driven by Mincer’s assumptions of no earnings while in school and exogenous post-schooling employment.

Regulation of Bond/Debt/Debenture Market in Argentina

Bond markets are central to the development of an efficient financial system as they lead to the generation of market interest rates that reflect the opportunity cost of funds at a wide range of maturities. In economies lacking well developed debt markets, interest rates may not be competitively determined and thus may not reflect the true cost of funds. The availability of a wide range of financial assets also enables savers and investors to tailor their financial decisions to their preferences and requirements, which is essential for an efficient functioning of the intermediation process.Domestic bond markets have remained underdeveloped for much of Argentina’s modern history owing to a number of policy and structural impediments. The resulting structure of domestic government and private sector debt, which was heavily biased towards short-term and/or dollar indexed liabilities, contributed to a worsening of the financial crises in the region during the 1990s and early 2000s.

ASYMMETRIC EFFECTS OF THE BUSINESS CYCLE ON FIRM-FINANCED R&D

Business cycles might affect the ability of firms to finance R&D, since firms rely on cash flow to finance most R&D activities. However, business cycles also influence the incentive to perform R&D. The opportunity cost of funds devoted to R&D falls during recessions, since the return on production will likely be lower than during an expansion. During recessions, this provides firms with an incentive to redistribute an existing pool of funds away from production and towards R&D projects. The changes in the size and distribution of the pool may also be asymmetric across the business cycle. For example, cash-flow constraints are more likely to bind during recessions than expansions. This paper finds strong evidence for the cash-flow effect, but not the opportunity-cost effect. This means that R&D is pro-cyclical, but smoothing out the business cycle will actually lead to reduced R&D, since the duration of expansions exceeds the duration of recessions.

Discounted Cash Flows Analysis and the Discounting Procedure in Market Valuations - How We Understand Them: A Brief Conceptual Note for Professional Valuers

This brief Paper presents the jist of our views on the discounting principle and methodology as used within the area of Professional Valuation. Singled out for concise treatment are the following: 1) Relationship between the general DCF framework and different yield capitalization techniques- same or different thing? 2) DCF - a tool for forecasting fantasy or credible framework for relative terms of reference? 3) Discount rate as the opportunity cost of funds. 4) The nature of valuation risks and whether it is appropriate to incorporate all of them within a discount rate. 5) CAPM - is there any alternative and does it hold in the area of Professional Valuation?

Factors Determining The Firm’s Cost Of Capital

This study is ready to connect the firm's investment decisions with its financing decisions. The cost of capital provides this fundament al connecting link. The term cost of capital may be used interchangeably with the firm's required rate of return, the hurdle rate, the discount rate, and the firm's opportunity cost of funds. This study is about the concepts behind the cost of capital, as well as the procedures for estimating the firm's cost of capital. For the most part, we will assume a constant debt-to-equity mix when computing a company's cost of capital.

Demand shocks and firm-financed R&D expenditures

Business cycles might affect firms' ability and incentive to perform R&D. Firms finance most R&D activities out of cash flow so when cash flow decreases the funds available for R&D also decreases. This limits the ability of firms to perform R&D, potentially leading to reduced R&D expenditures during recessions. However, business cycles also influence the incentive to perform R&D. The opportunity cost of funds devoted to R&D falls during recessions since the return on production will likely be lower than during an expansion. During recessions, this provides firms with an incentive to redistribute an existing pool of funds away from production and towards R&D projects. This paper tests whether the business cycle influences the incentive and ability of firms to engage in R&D activities, in particular examining whether the response is symmetric across the business cycle.

Some curious properties of a familiar model of debt and default

Because sovereign borrowers may default, lenders charge contractual interest rates different from their opportunity costs of funds. This contractual rate may be above or below the borrower's marginal product of capital and cannot guide domestic investments. Other curious results obtain.

Malaysia’s Public Enterprises: A Performance Evaluation

Malaysia's public enterprises (PEs) account for almost one-third of the country's GDP. This share is among the highest in the world, and clearly surpasses the importance of PEs in other ASEAN countries. In this article the performance of Malaysia's PEs is analysed. The evaluation of performance is based on trends in the number of profitable PEs; trends in the rates of return; and comparisons with private sector on the basis of profitability and cost efficiency. It is found that PEs had low rates of return during the entire period of the study, and well below the opportunity costs of funds. An estimate of the foregone output due to the inferior performance of PEs is derived and the maximum estimates are found to approach ten per cent of the GDP in 1986. Explanations for low performance, in terms of theoretical reasoning, government policies, and the Malaysian institutional setting, are also provided. Malaysia's public enterprises (PEs) account for almost one-third of the country's gross domestic product (GDP). This share is among the highest in the world, and clearly surpasses the importance of PEs in other ASEAN countries. In Malaysia, pub lic enterprises have been used as a response to market failure; for achieving income distribution goals and restructuring of society; for the pursuit of socio-economic objectives; and for the creation of a heavy industrial base. Their growth has been spectacular and unrestrained. Once set up, they acquired a dynamism of their own. Relatively autonomous corporations and holding companies have, for a variety of reasons, expanded and di versified. Often this expansion has been in areas not envisioned at the time of their establishment

Abandonment value and capital budgeting under uncertainty

The objective of this article is to provide a solution to the capital deepening (optimal economic life) problem encountered in capital budgeting under conditions of uncertainty. Specifically, we address the capital deepening problem where project cash flows, the terminal value of the asset, and the opportunity cost of funds are all random variables. In addition, we consider the impact of risk averse behavior on the solution to the problem, much as Sandmo has done with respect to the capital widening decision.

Minimum Deposit Plans. Miracles or Mirages

Minimum Deposit Plans. Miracles or Mirages

A PORTFOLIO MODEL OF CAPITAL BUDGETING UNDER RISK*

IT HAS LONG BEEN RECOGNIZED that the capital investment decision has two aspects: (1) it requires a commitment of wealth at one point in time in exchange for the opportunity to obtain income at one or more future points in time, and (2) the future income to be obtained is uncertain. A subproblem under (2) is the uncertainty associated with selecting combinations of projects where the returns from the several projects are statistically interdependent. This study develops a mathematical model for analyzing and selecting an optimal portfolio of capital projects when returns from project opportunities and from the firm's existing capital assets are not known with certainty. The model combines the problem of uncertainty of future cash flows from the firm's project opportunities and existing capital assets with the problem of selecting combinations of projects promising the highest return for a given level of risk. Recognizing that a decision to commit resources to current projects may affect resource availabilities and capital investment decisions in future periods, the model also emphasizes the time dimension of capital planning, explicitly treating the intertemporal relationship between current commitments and project opportunities available at various future points of time. The model in the study is developed in three stages. The first stage focuses on the decision maker's subjective probability distribution of projects' annual net cash flow. No restrictive assumptions regarding the shape of the probability distributions are necessary. Specific cash-flow values from the distributions are identified by Monte Carlo simulation. In the second stage of the model, the decision maker is asked to formulate his risk-preference function and to specify his financial resources. Funds available for capital investment may be limited or unlimited, and the relevant capital markets be perfect or imperfect. The final stage of the model uses mathematical programming to identify optimal combinations of new projects and existing capital assets. The type of programming algorithm used-quadratic or integer-depends on the acceptability of fractional projects in the optimal portfolio. Weingartner's basic horizon model is used with the Monte Carlo-simulated cash flows and Markowitz's variance-covariance measure of risk to find a distribution of optimal portfolio values. The project portfolio maximizing the decision maker's preference function is found, within the framework of a payoff table, by identifying the portfolio with the highest expected utility. Extensions of the portfolio model include detailed study of the dual to the quadraticprogramming problem of project selection and a computer test of the model using artificial data. Through the dual problem, the firm's annual opportunity cost of funds (discount rate) is shown to be a function of its annual liquidity position and available project opportunities and, therefore, to change from year to year with changes in the firm's liquidity and investment alternatives. The marginal utility of any project in the project opportunity set is also found through the dual problem. An individual project's marginal utility is shown to depend on the absolute level of its cash flows, the effect of its cash flows on the annual liquidity position of the firm as well as the liquidity

Project Evaluation and the Managerial Limit

1GREAT deal has been written, especially since the publication of Joel -Dean's pioneering work in 1951,1 on the criteria which should govern the selection of investment projects for implementation if the objective is maximization of profits or maximization of share prices. Dean's recommendation that projects should be ranked according to their prospective rates of return has been strongly attacked, and alternative criteria have been put forward, based on the present value of expected cash flows discounted at a rate equal to the cost of capital or to the opportunity cost of funds. But all these criteria have this in common: They depend for their rationality upon the assumption that the volume of projects which can be undertaken is limited either by the amount of funds available or by shortage of investment opportunities. In this paper, it will be suggested that for a large and important class of firms neither funds nor opportunities are the critical factor limiting expansion; and that for those firms the ranking of projects according to simple financial criteria will not lead to an optimal investment policy.