Value Of Future Cash Flows Research Articles

Kapitał klienta a wartość rynkowa na przykładzie bankowości detalicznej

Niniejszy artykuł koncentruje się na badaniu zależności między wartością życiowa klienta a wartością rynkową banków na rynku polskim. Wielu autorów (P. Seybold, S. Gupta, D. Lehmann, R. Boulton, B. Liebert, S. Samek, R. Heiebeler, T. Kelly, Ch. Ketteman, P. Doyle) wykazywało pozytywną zależność miedzy wartością przyszłych przepływów pieniężnych od bazy klientów firmy a prognozowaną wyceną rynkową firmy przez inwestorów. Innym zastosowaniem wartości życiowej klienta jest zarządzanie kapitałem klienta poprzez rozwijanie klientów, ochrona relacji z nimi, zacieśnianie relacji czy zwiększanie ich wartości. Głównym założeniem artykułu jest przybliżenie metody CLV oraz zbadanie rozlicznych korelacji tego wskaźnika z wynikami finansowymi banków giełdowych. Artykuł koncentruje się także na metodologiach i trudnościach wyliczania CLV. W tym przypadku zbadane zostaną dwie metody liczenia CLV – jedna oparta na zysku z działalności podstawowej, a druga hipotetycznie bardziej dokładna na zysku brutto w segmencie operacyjnym detal. W związku z przyjętym podejściem ukazana zostanie charakterystyka tak rozumianego kapitału klienta na polskim rynku banków giełdowych wyliczana osobno dla CLV na zysku z działalności podstawowej oraz na zysku brutto. Wiele badań wykazywało pozytywną korelację między wartością szacunkowych przyszłych przepływów pieniężnych bazy klienckiej banku a wartością rynkową firmy. Finalnie zweryfikowana zostanie hipoteza o wysokiej korelacji między wartością życiową bazy klientów banku a jego wartością rynkową banków.

Using real options theory to explain patterns in the valuation of research and development expenditures

Real options theory posits that the value of the firm is a combination of the value generated by the assets in place and the value of the option to invest in the future. It is based on the idea that many decisions are difficult to reverse, and valuing the outcome of these decisions is more complicated than estimating the present value of future cash flows. RD however, recent work has raised questions about whether this positive relation occurs across firms reporting both profits and losses. Consistent with real options theory, I find that the negative coefficient on the R&D expenditures of profitable firms documented by prior studies only exists for low growth firms. In addition, for all R&D firms experiencing high sales growth, the market places a lower value on assets in place and a higher value on R&D expenditures.

Calculating a Consistent Terminal Value in Multistage Valuation Models

Valuation analysis based on the present value of future cash flows often requires a multistage valuation model which includes a terminal value. An accurate calculation of the terminal value is very important, particularly if it represents a significant portion of the stock price. A typical analysis would include a finite forecast of cash flows for a five to ten-year period followed by a terminal value that represents all the cash flows thereafter. A common assumption is that the valuation cash flows beyond the finite horizon simply continue to grow at a lower long-term growth rate. The analysis in this paper demonstrates that such an assumption is rarely appropriate except under very restrictive assumptions, if consistent accounting relationships are maintained. Using dividends as the valuation cash flows in an example calculation, the dividend at the point that the growth rate declines is shown to increase by a step function rather than simply growing at a lower, mature growth rate. The size of the step function increase is then shown to change when the values of various key value drivers in the analysis are also allowed to change. Such value drivers include the EBIT margin, the asset intensity, and the relative level of debt. The step function increase in dividends can have a significant effect on the size of the terminal value and highlights the importance of maintaining consistent accounting relationships when forecasting future cash flows in a multistage valuation model.

Customer Lifetime Value

This technical note introduces important metrics firms use to monitor customer relationships. An important summary of customer activity is the profit the firm receives from each customer. profit (CP) is the metric that summarizes the past financial performance of a customer relationship and is covered in a companion note, Customer Profit (UVA-M-0799). The central difference between CP and customer lifetime value (CLV) is that CP measures the past and CLV looks forward. This note addresses the forward-looking metric that attempts to put a dollar value on a customer relationship.This technical note is an excerpt of the more comprehensive treatment of customer metrics found in Customer Profitability (UVA-M-0718). Excerpt UVA-M-0800 Rev. Jun. 19, 2014 Customer Lifetime Value As Don Peppers and Martha Rogers are fond of saying, “Some customers are more equal than others.” One way to examine these differences is through customer profit (CP), the difference between the revenues and the costs associated with the customer relationship during a specified period. The central difference between CP and customer lifetime value (CLV) is that CP measures the past and CLV looks forward. As such, CLV can be more useful in shaping managers' decisions but is much more difficult to quantify. Quantifying CP is a matter of carefully reporting and summarizing the results of past activity, whereas quantifying CLV involves forecasting future activity. Customer Lifetime Value: The Present Value of the Future Cash Flows Attributed to the Relationship The concept of CLV is nothing more than the concept of present value applied to the cash flows of the customer relationship. The present value of any stream of future cash flows is designed to measure the single lump-sum value, today, of those future cash flows. CLV represents the single lump-sum value, today, of the customer relationship. Even more simply, CLV is the dollar value of the customer relationship to the firm. It is an upper bound on what the firm would be willing to pay to acquire the customer relationship as well as an upper bound on the amount the firm would be willing to pay to avoid losing the customer relationship. If we view a customer relationship as an asset of the firm, CLV would represent the dollar value of that asset. One way to project the value of future customer cash flows is to make the heroic assumption that the customers acquired several periods ago are no better or worse (in terms of their CLV) than the ones currently acquired. We then go back and collect data on a cohort of customers, all acquired at about the same time, and carefully reconstruct their cash flows over some finite number of periods. The next steps are to discount the cash flow for each customer back to the time of acquisition, to calculate the sample customers' CLVs, and then to average all sample CLVs together to produce an estimate of the CLV of each newly acquired customer. This method is referred to as the “cohort and incubate” approach. Equivalently, one can calculate the present value of the total cash flow from the cohort and divide by the number of customers to get the average CLV for the cohort. If the value of customer relationships is stable across time, the average CLV of the cohort sample is an appropriate estimator of the CLV of newly acquired customers. . . .

A Study on Fundamentals as Determinants of Firm Value under Restriction of Size, Governance and Diversification

Firm value is present value of future cash flows expected from the firm – a basic theory of corporate valuation. Fundamental analysis is the one in which they try to find out variables that determine corporate cash flows and/or discount factors. We are especially interested in the role of size, governance and diversification in determination of firm value by fundamentals. We use Korean listed firms for our test. We document that firm value is positively and very significantly explained by fundamentals. Variables that are related to cash flows and/or discount factors are also found to significantly explain firm value. In addition, firm size and governance significantly affects firm value. Diversification strategy, however, is not significantly explaining firm value. It shows negative significance only in combination with R&D. In addition, our finding support that more cash flows and more R&D by larger firms will lead to higher firm value, and R&D by more diversified firms decreases firm value. Our findings would be helpful in designing good corporate policies on management of cash flows or capital structure to boost up firm value, or in managing stock portfolios.

Market impact of proved reserves disclosures by US publicly held oil and gas exploration and development companies

US generally accepted accounting principles (GAAP) permit publicly held oil and gas exploration and development companies (OGEs) to report exploration and development costs under either the successful efforts (SE) or the full cost pool (FC) method, which results in a lack of comparability of financial statements of FC and SE companies. In an attempt to eliminate information asymmetry, OGEs must disclose detailed information about proved reserves, including the discounted present value of future cash flows from proved reserves. This study investigates whether these reserve disclosures enhanced comparability between firms using FC and SE accounting. Quantitative research methods utilising multiple regression analysis techniques examine whether the present value of future cash flows from proved reserves discounted at 10% (PV10) and reserve quantity disclosures predict changes in market capitalisation. Although the various reserve disclosures required by the FASB (2014b) reduce information asymmetry between management and investors, the findings from this research indicate that investors in FC and SE companies use different data to determine the prices they are willing to pay for the companies' stocks. Therefore, these disclosures have not provided investors with a uniform set of criteria that can be used to compare a FC company with an SE company.

Impact of acquisition announcement on the valuation and decision of acquirers' in India - a conceptual framework

The impact of acquisition announcement on the returns to acquiring firms around the announcement is a significant area of research as abnormal returns are considered to be the present value of future cash flows. This study conceptually analyses the valuation of acquirers, their decision to acquire and the consequences of acquirer decisions thereby developing a framework for analysing the acquirer performance using the pre-acquisition factors of acquirers such as financial, behavioural and deal parameters. Thus, this study provides a review of the various research developments in the area of valuation of acquirers and identifies the major research gap thereby providing a path for future researchers and industrialists but suggesting a new model for analysing the acquirer decisions using new parameters into the acquisition literature.

Interest Rate Risk Management of Commercial Banks in Bangladesh Based on IS (Interest Sensitivity) GAP Analysis

This paper on the interest rate risk management of a bank will provide a detailed picture of risk management of bank because it is one of the concerned factors for every bank. This study will also indicate any shortfall of bank in terms of interest rate risk management and offer suitable recommendations. Interest rate risk is the exposure of a bank's financial condition to adverse movements in interest rates. Accepting this risk is a normal part of banking and can be an important source of profitability and shareholder value. However, excessive interest rate risk can pose a significant threat to a bank's earnings and capital base. Changes in interest rates affect a bank's earnings by changing its net interest income and the level of other interest sensitive income and operating expenses. Changes in interest rates also affect the underlying value of the bank's assets, liabilities, and off-balance-sheet (OBS) instruments because the present value of future cash flows (and in some cases, the cash flows themselves) change when interest rates change. Accordingly, an effective risk management process that maintains interest rate risk within prudent levels is essential to the safety and soundness of banks.

Equity Valuation: Premium to Interest Rate Structure Model

Among the Equity Valuation models, the Discounting of cash flow (DCF) uses the cost of equity capital as a discounting rate in determining the value of equity. The cost of equity capital is usually calculated using the CAPM. The capital asset pricing model is backward looking as its components like beta and risk premium are based on the historical data. Most factor models used in academics and in practice consider historical data of stock returns and index to determine the cost of equity. The stock price which reflects the present value of future cash flows cannot be completely based on historical data for discounting. This paper proposes a modified model of DCF which takes into account a forward looking cost of equity capital. The model will include the time dynamic changes in the components of the cost of capital as opposed to those with time static components. It is proposed to use the forward looking risk free rate, obtained through bootstrapped spot curve, to which the forward looking time dynamic risk premium times the forward looking beta is added in order to arrive at the cost of equity. This forward looking cost of equity is then used for discounting of the estimated future cash flows to arrive at the value of the stock.

A parametric whole life cost model for offshore wind farms

Life cycle cost (LCC) considerations are of increasing importance to offshore wind farm operators and their insurers to undertake long-term profitable investments and to make electricity generation more price-competitive. This paper presents a cost breakdown structure (CBS) and develops a whole life cost (WLC) analysis framework for offshore wind farms throughout their life span (∼25 years). A combined multivariate regression/neural network approach is developed to identify key cost drivers and evaluate all the costs associated with five phases of offshore wind projects, namely pre-development and consenting (P&C), production and acquisition (P&A), installation and commissioning (I&C), operation and maintenance (O&M) and decommissioning and disposal (D&D). Several critical factors such as geographical location and meteorological conditions, rated power and capacity factor of wind turbines, reliability of sub-systems and availability and accessibility of transportation means are taken into account in cost calculations. The O&M costs (including the cost of renewal and replacement, cost of lost production, cost of skilled maintenance labour and logistics cost) are assessed using the data available in failure databases (e.g. fault logs and O&M reports) and the data supplied by inspection agencies. A net present value (NPV) approach is used to quantify the current value of future cash flows, and then, a bottom-up estimate of the overall cost is obtained. The proposed model is tested on an offshore 500-MW baseline wind farm project, and the results are compared to experimental ones reported in the literature. Our results indicate that the capital cost of wind turbines and their installation costs account for the largest proportion of WLC, followed by the O&M costs. A sensitivity analysis is also conducted to identify those factors having the greatest impact on levelized cost of energy (LCOE). The installed capacity of a wind farm, distance from shore and fault detection capability of the condition monitoring system are identified as parameters with significant influence on LCOE. Since the service lifetime of a wind farm is relatively long, a small change in interest rate leads to a large variation in the project’s total cost. The presented models not only assist stakeholders in evaluating the performance of ongoing projects but also help the wind farm developers reduce their costs in the medium–long term.

The role of the theory of real choices in the development of financial managers and their decisions in the evaluation of investment decisions

According to traditional theory of the capital budget, the net present value of future cash flows of the project are discounted at an appropriate discount reflects the degree of volatility in expected future cash flows. If the net present value is positive accept the project and vice versa. And also do not show the actions that can be taken after the acceptance of the project and the commencement of work that could result in an increase or decrease of cash flows, and here highlights the shortcomings with the current environment variables that are complex, leading to a search for new methods in line with these new variables and of the theory real options to evaluate investment decisions and that gives a big role Skilled managers in making capital decisions, which is reflected in the cash flows of investment decisions and future reduction of risk, hence requiring real options theory enjoy CFOs high skills in order to maximize the company to which they belong value, so the company's skilled management is an important tributary of the success of companies that are looking for the competitive advantage that achieve the company's goals and the reduction of risk and the resulting Allatakd and of cash flows that you get as a result of the decisions of its managers.

The Developing Federal Student Loan Debacle and the Real Cost to Taxpayers

Government financed student loan debt of $1.3 trillion has grown 15% a year for over a decade as tuition and other college costs have risen at a multiple of the inflation rate. Problematic are defaults and income-based repayment arrangements with their partial loan forgiveness. Applied to this burgeoning balance they pose a serious burden on taxpayers and the economy that bear the costs and effects of borrowing and taxation to fund the program. Also alarming is the prospect of total loan forgiveness and ongoing free college education gaining political currency amid the wails of so many overextended borrowers, some of whom seemingly face lifelong debt. This paper examines the true cost of the student loan program which is enormously distorted by the U.S. Department of Education and the Congressional Budget Office. The reason is the Federal Credit Reform Act of 1990 (FCRA) requires government to adopt a misleading methodology for computing the program’s profit and loss that greatly understates defaults. As a result, the program is mistakenly believed to be profitable. Specifically, the government computes operating results based on a net present discounted value of future cash flows. This process effectively amortizes defaults over the remaining life of respective loans, which can be up to 20 years or more, rather than recognize them fully in the period they occur like a bank. The analysis herein contrasts this methodology (subject to the limitations of opaque federal accounting), with a pro forma presentation of operations based on generally accepted accounting principles (GAAP) observed by banks. The upshot: a $135 billion government projected profit for the ten-year period 2015-2024, versus a $1.9 trillion loss that a bank would report. As such, the real cost of the student loan program in the coming years compares with the losses of the 2008 financial crisis as explained in the study.And that is just the current student loan program. If blanket loan forgiveness were declared in the next decade, taxpayers would bear an immediate budget hit of $1 trillion to $4 trillion depending on the loans outstanding at the time of implementation. In addition, taxpayers would have to support subsequent free college for all thereafter. Not only is this time bomb concealed by the current accounting methodology, but also by the political class that is loathe to inviting opposition to a program that could be a new government entitlement.

Measuring and Understanding Brand Value in a Dynamic Model of Brand Management

We develop a structural model of brand management to estimate the value of a brand to a firm. In our framework, a brand’s value is the expected net present value of future cash flows accruing to a firm due to its brand. Our brand value measure recognizes that a firm can change its brand equity by investing in advertising. We estimate quarterly brand values in the stacked chips category for the period 2001–2006 and explore how those values change over time. Comparing our brand value measure to its static counterpart, we find that a static measure, which ignores advertising and its ability to affect brand equity dynamics, yields brand values that are artificially high and that fluctuate too much over time. We also explore how changing the ability to build and sustain brand equity affects brand value. At our estimated parameterization, if brand equity were to depreciate more slowly, or if advertising were more effective at building brand equity, then brand value would increase. However, counterintuitively, we find that when the effectiveness of advertising is sufficiently high, increasing the rate at which brand equity depreciates can increase the value of a firm’s brand, even as it reduces the value of the firm overall.Data and the online appendix are available at https://doi.org/10.1287/mksc.2016.1020 .

The Potential Impact of Current and Future Pharmaceutical Policy Changes on Cash Flows for Innovative Medicines

Licensing used to be the main requirement for marketing a new pharmaceutical. Now, decisions by reimbursement authorities and other pharmaceutical policy changes are increasingly determining future profitability. We explore the financial consequences for the pharmaceutical industry of complying with requirements of reimbursement authorities and pharmaceutical policy reforms and find that the financial value of a pharmaceutical company is a function of its current and potential future revenues and expenditures. These are heavily influenced by regulatory decisions, often taken at, or near, product launch. The scenarios discussed are: central evaluation of cost-effectiveness, conditional reimbursement, risk-sharing schemes, pay-for-performance models, value-based assessment, and decentralization. Requirements to submit economic data to inform the pricing and reimbursement process, and new business models, such as value-based pricing and risk-sharing agreements, have financial consequences for the pharmaceutical industry, altering their net present value of future cash flows from new drugs. We conclude that reimbursement, rather than licensing, is essential to generate sales. Hence, the initial market valuation of positive clinical trial results or a new registration must be adjusted for the expected outcome of reimbursement, actual market access, and the corresponding cash flows resulting from sales and costs.

On the Present Value Model in a Cross Section of Stocks

We construct a cross-section of stock prices and their corresponding present values of future cash flows. A regression of present value on the initial stock price should have a slope coefficient equal to 1.0. For short horizons, this is a cross-section version of checking the random walk model and the present value model holds up well. In contrast, using three different samples that go as far back as 1926, the present value model is rejected decisively at moderate and long horizons. We can rule out the possibility that the failure of the present value relationship is due to a misunderstanding of the dividend process. The remaining possibilities are either that agents do not discount very far into the future in a manner consistent with the present value model, or that models of discount rates are too limited to allow the present value model to be a good fit to the data for most firms. We find that the present value works much better, albeit still imperfectly, for larger firms. We also find that stocks that appear on the exchanges for fewer years than longer-lasting stocks deviate even more from the present value model. Our results can be interpreted as a cross-section version of the variance-bounds test, with the result that prices are very much more variable than they ought to be.

An Empirical Study of the Dynamics of Brand Building

We develop a structural model of brand management to estimate the value of a brand to a firm. In our framework, a brand's value is the expected net present value of future cash flows accruing to a firm due to its brand; our brand value measure recognizes that a firm can change its brand equity by investing in advertising. We estimate quarterly brand values in the stacked chips category for the period 2001-2006, and explore how those values change over time. Comparing our brand value measure to its static counterpart, we find that a static measure, which ignores advertising and its ability to affect brand equity dynamics, yields brand values that are artificially high and that fluctuate too much over time. We also explore how changing the ability to build and sustain brand equity affects brand value. At our estimated parameterization, when brand equity depreciates more slowly, or when advertising becomes more effective at building brand equity, brand value increases. However, counterintuitively, we find that when the effectiveness of advertising is sufficiently high, increasing the rate at which brand equity depreciates increases the value of a firm's brand, even as it reduces the value of the firm overall.

PERBANDINGAN KEAKURATAN MODEL ARUS KAS METODE LANGSUNG DAN TIDAK LANGSUNG DALAM MEMPREDIKSI ARUS KAS DAN DIVIDEN MASA DEPAN

Cash flow information of company is useful for users of financial reports as a basis for assessing a company’s ability to meet the needs of liquidity or cash flow. Cash flow information also enables users of financial statements to develop models to assess and compare the present value of future cash flows from various companies in one sector. Some previous researches on the prediction of future cash flows and dividend showed different results. This research should be repeated to examine the ability of cash flow in predicting future cash flows and dividend. The purpose of this research is to find the empirical evidence of predictive models of future cash flows and dividend.
 The samples of this study are manufacturing companies listed in Indonesia Stock Exchange (IDX). The amount of the samples are 24 companies within the period of 2009-2011. The data was collected using purposive sampling method.
 The result of this study shows that a combination of earnings and accrual is able to predict future cash flows so the indirect method is more accurate in predicting future cash flows. However, a combination of cash inflows and cash outflows using direct method is more accurate in predicting future dividend.

Time varying costs of capital and the expected present value of future cash flows

The use of an inter-temporally constant discount rate or cost of capital is a strong assumption in many ex ante models of finance and in applied procedures such as capital budgeting. We investigate how robust this assumption is by analysing the implications of allowing the cost of capital to vary stochastically over time. We use the Feynman–Kac functional to demonstrate how there will, in general, be systematic differences between present values computed on the assumption that the currently prevailing cost of capital will last indefinitely into the future and present values determined by discounting cash flows at the expected costs of capital that apply up until the point in time at which cash flows are to be received. Our analysis is based on three interpretations of the Feynman–Kac functional. The first assumes that the cost of capital evolves in terms of a state variable characterised by an Uhlenbeck and Ornstein (“On the Theory of the Brownian Motion.” Physical Review 36(5): 823–841) process. The second and third interpretations of the Feynman–Kac functional are based on the continuous time branching process. The first of these assumes that the state variable tends to drift upwards over time, whilst the second assumes that there is no drift in the state variable. Our analysis shows that for all three stochastic processes there are significant differences between present values computed under the assumption that the currently prevailing cost of capital will last indefinitely into the future and present values determined by discounting cash flows at the expected costs of capital that apply up until the point in time at which cash flows are to be received. Comparisons are also made with the environmental economics literature where similar problems have been addressed by invoking a ‘gamma discounting’ methodology.

A POSSIBILISTIC APPROACH TO INVESTMENT DECISION MAKING

The concept of possibilistic mean value and variance of fuzzy numbers has been applied to investment decisions by using a nonlinear type of fuzzy numbers called adaptive fuzzy numbers. In this paper, by extending the notion of adaptive fuzzy number, we propose a more flexible methodology. Our aim is to allow decision maker more flexibility in dealing with ambiguity and uncertainty. To illustrate the use of our approach and its ability in dealing with ambiguity and imprecision we analyze, as an application, the fuzzy net present value of future cash flows and give some numerical results.

An uncertainty based multi-criteria ranking system for open pit mining cut-off grade strategy selection

Cut-off grade strategy (COGS) is a concept that directly influences the financial, technical, economical, and environmental issues in relation to the exploitation of a mineral resource. Despite the simple definition of cut-off grade, the COGS problem is one of the complex and complicated problems in the mine planning process. From the optimization point of view, the COGS with an objective of maximizing the present value of future cash flows is a non-linear and a non-convex problem that even in its deterministic form can be solved using approximate optimization methods. This optimization problem will also be more complex and complicated under uncertainty conditions. This paper proposes an uncertainty based multi-criteria ranking system to investigate the problem of COGS selection considering metal price and geological uncertainties. The proposed system aims at selection of the best COGS among technically feasible alternative COGSs under uncertainty circumstances. Our developed system is based on integrating metal price and geological uncertainties as well as operating flexibility to close the mine early. We incorporate this operating flexibility into the proposed system using a Monte Carlo based real options (RO) valuation model. For this purpose, in addition to the expected value, other risk criteria are considered to rank the alternatives. These risk criteria include abilities of strategies in producing extra profits, minimizing losses, and achieving the predefined goals of the production. In this study, the technically possible COGSs are generated using the Lane comprehensive algorithm. To demonstrate the effectiveness of the proposed system, we utilize data of an Iranian gold mine. Results show that the proposed system outperforms conventional methods in the sense that it shows significantly lower average mis-ranking than the other methods and also selects a strategy with a higher value. The sensitivity analysis of the proposed system relative to the gold price shows that the system is highly dependent on the parameters of the stochastic process used to model the evolution of the metal price. Therefore, special consideration should be given in estimating stochastic process parameters.