Value Of Future Cash Flows Research Articles

Analisis Blibiometrik Operating and Economic Exposure Dengan Publish or Perish dan VosViewer

This research aims to review comprehensive studies in an exploratory manner regarding operating exposure or economic exposure as an influence of fluctuations in the forex rate or foreign exchange rates on the present value of future cash flows in companies. The sample consists of 100 documents published in the period 2013 to 2023 using the crossref database with the keywords, forex rate, present value (PV), future value cash flow. This research conducted a systematic literature review using a bibliometric approach. Publish or perish and VOSviewer software were used to perform graphical analysis of bibliometric data and visualization of research results. Based on the visualization obtained, there are five types of colors as a clustering of links and relationships in terms of Operating Exposure which are searched in the database based on keywords. The first cluster is red which includes Indonesian stock exchange, earnings, stock price, value relevance, economic value. Then for the green cluster free cash flow and firm value. Then for the yellow cluster corporate governance, cash holding, and firm. Then for the light blue cluster, it is value and future direction. Then for the blue cluster it is rate, risk and overall tax advantages, and the last cluster in purple is net present value, return and cost. Bibliometric analytics can systematically review a number of studies to provide a less biased perspective. This also helps future research by combining research based on connectivity between keywords to better understand operating exposure in terms of company financial management.

Математичне моделювання динаміки страхової компанії на основі макропоказників

In the paper we investigate the dynamics of a life insurance company depending on changes in macro indicators. For the sensitivity study, profitability testing is performed for the average life insurance contract. Profitability testing is based on an estimate of the expected present value of future cash flows. Various approaches to the choice of discount rates are investigated. The choice of strategy for using the rates of the zero-coupon yield curve built on the UAH domestic government bonds is substantiated. The dependence of the zero-coupon yield curve on the change in the key rate is shown. The dynamics of the model at different levels of the interest rates, namely guaranteed investment income, average profitability of investment activity, key rate, is considered. The scenario of the predicted decrease in the key rate at the stage of post-war reconstruction of Ukraine is considered. The profitability of the insurance company was tested based on the macro parameters of the specified scenarios. The expediency of using the chosen approach for researching the dynamics of a life insurance company in the conditions of the current high volatility of the Ukrainian economy is shown.

Tembo Global Industries Limited – financing dilemma for the COVID-19 project

Research methodology The case proposes a discussion of the time value of money and capital budgeting concepts, including determining the effective overall cost of capital, estimating working capital requirements, consideration of all relevant cash flows – including opportunity costs, finding the present value of future cash flows (annuities and lump-sum cash flows) by linking the concepts of weighted average cost of capital and working capital and net present value (NPV) and internal rate of return (IRR). Case overview/synopsis Jehan Wadia, a newly appointed finance manager of Tembo Global Industries Ltd., is facing a dilemma in recommending an investment decision to Mr Variava, Chief Finance Officer. Implementation of the project requires an investment of INR 82m. Ms Stella, funding division head, proposed financing through equity and term loans in the proportion of 3:2, respectively. Mr Shrinivasan, handling the short-term financial needs of the firm, suggested a finance mix having a higher weight-age of debt. Mr Variava desires to maximize the wealth by taping the opportunity. The case is written for an experience in the capital budgeting dichotomy faced by managers in real-life situations. Complexity academic level This case can be used in various contexts – as a preparatory case in a foundation course of Financial Management at the graduate level to instill the fundamentals for evaluating long-term investment decisions or in courses of Strategic Financial Management or Corporate Finance at the undergraduate or graduate level as a capstone case to reinforce the application of multiple concepts in strategic financial decision making.

ESG Risks and the Value Relevance of Current and Historical Earnings

AbstractWe investigate whether independent, third‐party assessments of firms’ Environmental, Social, and Governance (ESG) risk exposures provide forward‐looking information content to capital market participants by evaluating whether these ESG risks have a moderating effect on the ability of earnings and the book values of equity to predict investors’ expectations of the present value of future cash flows. We find that firms’ higher ESG risk exposure increases the association between current earnings and firm values, while decreasing the relevance of book values of equity (i.e., historical earnings). We find that this effect is strongest for firms with the highest levels of risk exposure and following large changes to ESG risk exposures. In additional analyses, we disaggregate ESG risk exposure and while we find that each component of ESG has predictive power consistent with the main findings, governance risks dominant the results in head to head specifications. Taken together, our findings suggest that governance risk exposures provide forward‐looking information content to investors when they evaluate the ability of current earnings to predict future cash flows. Our results are robust to several measures of ESG risk exposure, entropy balancing specifications, and exogenous shocks to ESG attention following global environmental and social justice initiatives.

NET PRESENT VALUE (NPV) AS A REINFORCEMENT OF THE DECISION-MAKING PROCESS IN TERMS OF INVESTMENT SELECTION

Adequate competition, technical and technological development require enterprises to constantly change and make new investments. Investment is the ongoing expenditure of resources for future benefits. Investments usually involve the commitment of considerable cash resources and manifest themselves in the growth or replacement of tangible fixed assets. Each investment has an individual investment life cycle. The distribution of inflows and outflows associated with the preparation, implementation and operation of an investment. NPV is the net present value, or present value of future cash flows. This indicator predicts what income can be expected from a given investment in terms of the present value of money. Objective decision-making instruments can be constructed using the NPV method. NPV, as the difference between the present values of cash inflows and cash outflows analyzed over a period of time. NPV makes it possible to compare the money that needs to be paid to complete a planned investment with all the cash flows that the company will generate in the future. The NPV method is considered to be the most theoretically correct method for evaluating the profitability of investment projects. There is also a steady increase in interest in it in business practice. The advantages of the NPV method is that it takes into account the entire life cycle of the investment, all cash flows and changes in the value of money over time. A positive NPV value means that the investment contributes to an increase in the value of the company

Role of debt-to-equity ratio in project investment valuation, assessing risk and return in capital markets

In this paper, a case study was performed with an aim to analyze the asset returns for two different companies and the risk and returns from capital projects using standard capital asset pricing method. To demonstrate how the present values of future cash flows are influenced by discount rates when the debt-to-equity capital structure ratio is varied between 0 and 2.5 debt-to-equity. The breakeven sensitivity was also conducted in relation to different gross margin ratios of company. It was found that high value of debt-to-equity ratio yielded a flatter net present value with increase in gross margins. Capital appraisal techniques were applied to illustrate the project returns and annual cash flows and its relationship with change in cost of capital. Analysis showed that when average cost of capital is increased beyond threshold value, the net present value from the firm’s project investments reduced significantly. A covariance analysis was performed to determine individual returns from two stocks traded in BSE Sensex and S&P 500 indices using the beta values. Comparing the individual and total returns of two stocks revealed that returns not only increased with increasing beta values–but also varied with earnings potential, growth rate of firm, dividend payout ratios and trading stock price. The standard deviation on portfolio of two stocks has been computed for varying asset weight ratios. It has been found that positive correlation between two stocks increased equity risk when weight ratios are not balanced in portfolio, while a negative correlation reduced equity risk.

Non-traditional monetary policy and the future of the financial industries

This paper investigates how expansionary monetary policy after the Global Financial Crisis (GFC) has affected the U.S. banking sector. In response to the GFC, the Federal Reserve first lowered the overnight federal funds rate from 5.25% in August 2007 to zero in December 2008. It then turned to quantitative easing, purchasing housing agency debt, mortgage-backed securities, and longer-term Treasury bonds to stimulate the economy. While these policies helped the overall economy to recover, they may have harmed the banking sector. Banks accept safe short-term deposits and transform these into risky longer-term loans. They make a profit on the difference between the interest rate they earn on longer-term assets and the rate they pay of short-term deposits (the net interest margin). Low short-term interest rates and compressed spreads between long- and short-term interest rates may impair bank profitability. Bernanke and Gertler (J Econ Perspect 4:27–48, 1995) showed that reduced bank profitability can hinder their ability to extend loans. Bernanke (FRBNY Q Rev 18:50–70, 1993) noted that this is problematic because banks play a special role in channeling savings to promising borrowers. Financial markets are plagued by information imperfections. Savers release funds today for the promise of obtaining funds later. Whether they get repaid depends on the character of the borrower, the quality of the investment, the collateral that the borrower can provide, and other factors. The lender needs to consider these items and not just interest rates. Asymmetric information can thus hinder the flow of funds from savers to small businesses and other borrowers whose quality is hard to evaluate. Banks can bridge imperfect information problems because they have a comparative advantage because of the following reasons: (1) economies of specialization, as lending officers gain expertise in a particular industry; (2) economies of scale, as it is cheaper for bank to evaluate a loan than for small savers to; and (3) economies of scope, as it is cheaper to provide lending services together with other services. This paper investigates how lower short-term rates and falls in the spread between long-and short-term rates affect bank profitability. To do this, it investigates how these variables affect bank stock prices. Stock prices provide valuable information since they are the expected present value of future cash flows. The results indicate that falls in short rates and in the spread have caused large drops in bank stock returns after the GFC. Banks are also facing competitive pressures from Fin Tech firms and big technology firms. Their performance after the GFC has lagged other parts of the U.S. economy. They are thus vulnerable to negative shocks that could arise during a downturn or a crisis. The Fed should take account of the impact of their policies on the banking sector, since an interruption on the flow of credit through the financial system could prevent funds from going to the most promising firms. This misallocation of resources could then hinder long-term economic growth.

Stakeholder Orientation, Agency Problems of Free Cash Flow, and the Cost of Equity: Evidence from a Natural Experiment

Using staggered adoptions of Constituency Statutes (CS laws) that authorize but not mandate managers to consider non-owner stakeholders’ interests in business decisions, we find that the effect of expanding managers’ discretion in considering stakeholder interests on the cost of equity depends on the severity of agency problems of free cash flow. After the adoption of CS laws, the cost of equity decreases for firms with less severe but increases for firms with more severe agency problems. Additional analyses show that for firms with less severe agency problems, CS laws increase the expected future cash flows and reduce the risks, as manifested in a lower exposure to risks related to environmental, social, and governance (ESG) issues and a higher ability to weather negative industry-wide shocks. In contrast, for firms with more severe agency problems, the CS laws reduce the expected value of future cash flows without reducing the risks. Our results are relevant to the current policy debate on whether or not managers’ fiduciary duty should be expanded to all stakeholders.

Study on the Valuation Method for Overseas Oil and Gas Extraction Based on the Modified Trinomial Tree Option Pricing Model

Wandering of oil prices at lower values and the bitter reality have forced people to look for a more accurate valuation method for overseas oil and gas extraction of China. However, the currently available resource classification method, discount cash flow (DCF) method, and real option method all suffer from their own disadvantages. This paper identifies multiple uncertainty factors such as oil prices and reserves. It then investigates the transmission mechanism of how each uncertainty factor impacts the oil and gas extraction value and quantifies the transmission efficiency. The probability distribution patterns of each uncertainty factor have been determined; the trinomial tree option pricing model is modified, with consideration upon the nonstandardness of the probability distribution. Decision points and strategies space are designed in accordance with the practical oil and gas production; and the Bermuda option is adopted to replace the conventional decision-based tree model with the probability-based tree. Finally, a backward algorithm is developed to calculate the probability at each decision point, which avoids difficulties in determining the asset volatility ratio; and a case study is presented to demonstrate application of the proposed method. Results show that decision rights for overseas investment are valuable. The value of extraction does not yet necessarily grow with higher uncertainty, and instead, it is under joint effects of the cash flow and strategy space. So, valuation should incorporate the composite value of future cash flow and decision rights. Volatility of the value of extraction is not solely dependent on the oil price, but affected by multiple factors. Similar to the Bermuda option, the decision-making behavior for oil and gas extraction occurs only at finite decision points, to which the trinomial tree option pricing model is applicable. The adoption of probability distribution can to a great extent exploit the uncertain information. Replacement of the decision-based tree with the probability-based tree provides more accurate probability distribution of the calculated value of extraction, and moreover the disperse degree of the probability can reflect how high risks are, which is conducive to decision-making for investment.

Evaluation of Renewable Energy Project by Risk Sensitive Value Measure Method

Due to the uncertainty of electric power price and output of renewable energies, investors for renewable energies are facing large risks. To estimate the project, Net Present value (NPV) is well employed, however, NPV cannot evaluate risk correctly because it evaluates only the expected value of future cash flow. We have proposed a new evaluation method using Risk Sensitive Value Measure (RSVM) and it is applied to thermal power plant project. In this paper, we present the evaluation of the renewable energy project by RSVM. By using RSVM, the optimum and the maximum investment for renewable energy project is obtained.

Actuarial valuations to monitor defined benefit pension funding

Abstract This paper is motivated by The Pensions Regulator (TPR)’s review of its Code of Practice on funding for defined benefit schemes and aims to suggest how trustees and regulators should monitor the extent to which scheme assets are adequate to cover liabilities. It concludes that current practice is inadequate and needs to change. A review is carried out of papers on not only this subject but also (to collect ideas rather than automatically apply them to pensions solvency valuations) pensions and insurance accounting and regulation. Current practice is “scheme-specific funding” which permits discretion on choice of discount rates and other assumptions; the paper is concerned that this can lead to bias, and that trends in a scheme’s solvency can be obscured by changing assumptions. This also leads to the funding ratio communicated to scheme members having little meaning. The paper suggests that regulators should require a valuation that is based on sound principles, objective, fair, neutral, transparent and feasible. A prescribed methodology would replace discretion. It concludes that the benefits to be valued are those arising on discontinuance of the scheme, without allowing for future salary-related benefit increases, which are felt to no longer be a constructive obligation of employers. The valuation should, it is suggested, use market values of assets, which is largely current practice. Liabilities should reflect the trustees fulfilling their liabilities, rather than transferring them to an insurer (which may introduce artificialities). The discount rate should follow the “matching” approach, being a market-consistent risk-free rate: this is consistent with several papers to the profession in recent years. It avoids the problems of the “budgeting” approach, where the discount rate is based on the expected return on assets – this can be used to help set contribution levels but is not suitable for determining the value of liabilities, which depends on salary, service, longevity, etc and (very largely) not on the assets held. In principle, the liability value can be adjusted for illiquidity. Credit risk of the employer should not be allowed for. Liabilities should reflect the (probability-weighted) expected value of future cash flows and should not be increased by prudent margins or risk margins (which would lead to a non-neutral figure). Risk disclosures are needed to understand and manage risks. The resulting funding ratio is a consistent measure, to be disclosed to members, which can be used to manage the scheme, and by regulators as the basis for requiring action. Scheme-specific management using data such as the employer covenant means that immediate action to ensure 100% solvency on the proposed basis would not necessarily be appropriate. The author encourages the profession to advise TPR on the above lines.

Die Auswirkungen der COVID-19-Pandemie auf die zur Anwendung kommenden Diskontierungsverfahren im Rahmen der Unternehmensbewertung

The COVID-19 pandemic has a drastic impact on the entire global economy. In the following article, the impacts of the crisis on business valuation are presented. The focus is on the valuation parameters of the discounted cashflow method, in which the business value is the present value of future cash flows regarding on the valuation date.

Управління капіталом акціонерних товариств за зростання нематеріальних активів

The article provides an assessment of the value of an enterprise in the context of an increase in the capitalization of the country's economy as the most important factor in strengthening competitive advantages on the example of the market of steel and iron casting for car building. It has been substantiated that the valuation of the enterprise is limited by the poor development of the domestic securities market, since the growth potential of the current value of shares is not taken into account, depending on the perception of the value of the brand and related intangible assets. It is generalized that the existing directions of effective assessment of the cost of the production potential of an enterprise when organizing the release of new products, subject to investment in modern technologies and technological solutions, are not able to provide a significant inflow of investments in the required volume, especially in intangible assets. The analysis of the factors of formation of the potential for growth and the current value of the enterprise for shareholders is carried out according to two main elements: the present value of future cash flows in a specific forecasting period; long-term value of shares depending on the perception of the value of brands and related intangible assets, that is, research and development work, concluded contracts, brand name, new technologies and technological solutions, and the like. The main factors of the strategic prospects for building up intellectual capital in conjunction with an increase in product sales, it is advisable to include the growth of market capitalization. The key factors in the growth of market capitalization are technologies and technological solutions of innovative types of products: steel ingots, which are used to produce pipe billets used in power units and nuclear power plants; rear axle housing of KrAZ heavy-duty vehicles; automatic couplings designed for the transmission of shock and traction forces devices for placing the mechanism, together with which the coupling and uncoupling of the cars is carried out; steel castings for pipeline fittings; draft gears are designed to mitigate longitudinal forces transmitted through the automatic coupler to the frame and other parts of the car.

Valuation of hotel property: issues and challenges

Purpose The purpose of this paper is to provide a practitioners’ perspective on the valuation models used for valuing hotel property and the challenges posed by traditional valuation models in their application and use. Set in the context of the Indian hospitality industry, the paper brings out the paradigm shifts that have taken place in recent years in the context of valuations. The paper also attempts to provide resolution to the issues and challenges raised. Design/methodology/approach This study assimilates data from senior finance professionals and by using semi-structured interviews, draws on a wide spectrum of hotels in India. Findings The findings suggest that the earnings-based models are largely followed in valuing hotel property in India. The major challenges encountered in the valuation process as highlighted by the respondents are related to (a) the growing uncertainty associated with projections of future earnings given the plethora of assumptions made at a micro and macro level, and (b) determination of an appropriate discounting factor for computing the present value of future cash flows. Research limitations/implications This paper generates useful qualitative information on existing practices in valuation in the Indian hospitality sector. The findings will be useful for hoteliers, policymakers and researchers in bringing forth the valuation challenges faced in the context of a developing economy and its characteristic institutional weaknesses. The findings of this paper may be furthered through appropriate and detailed quantitative analysis of primary and secondary data on the issues and challenges raised here. Originality/value This paper makes a sincere attempt to highlight the real challenges faced in valuing hotel properties and as such adds value to the existing literature.

Single vs. cross distribution channels with manufacturers’ dynamic tacit collusion

A manufacturer can choose to distribute its products through one retailer (single distribution) or across multiple retailers (cross distribution). In this paper, we develop a dynamic model to examine the interactions between two manufacturers' distribution channel strategies and their collusion incentives. Contrary to conventional wisdom, we find that single distribution does not always facilitate collusion between the manufacturers and that collusion is only facilitated when both adopt single distribution channels. In other words, an asymmetric cross-distribution channel structure helps to deter upstream collusion. Our results also suggest that retail mergers can hinder upstream collusion. Furthermore, we show that the equilibrium endogenous channel structures crucially depend on the discount factor of future cash flows and the relationship between the manufacturers' products (substitutes vs. complements). Specifically, when the products are highly substitutable, and manufacturers’ value of future cash flow is sufficiently low, the win-win equilibrium channel structure operated by the manufacturers comprises single distribution channels. However, such an equilibrium channel structure hurts consumers and social welfare when compared with cross-distribution channel structures. In all other instances, the win-win equilibrium structure chosen by the manufacturers yields cross-distribution channels, which also benefit consumers and social welfare.

Valuation Implications of Unconditional Accounting Conservatism: Evidence from Analysts' Target Prices

ABSTRACTWe examine whether financial analysts understand the valuation implications of unconditional accounting conservatism when forecasting target prices. While accounting conservatism affects reported earnings, conservatism per se does not have an effect on the present value of future cash flows. We examine whether analysts adjust for the effect of conservatism included in their earnings forecasts when using these forecasts to estimate target prices. We find that signed target price errors (actual minus forecast) have a significant positive association with the degree of conservatism in forward earnings, suggesting that target prices are biased due to accounting conservatism. Cross‐sectional analysis suggests that more sophisticated analysts and superior long‐term forecasters adjust for conservatism to a greater extent than other analysts. In additional analyses, we explore the mechanism through which conservatism leads to bias in target prices. We first show that analysts' earnings forecasts are negatively associated with the degree of conservatism; that is, analysts include the effect of unconditional conservatism in their earnings forecasts. Based on alternative earnings‐based valuation models that analysts may use, our evidence suggests that analysts fail to appropriately adjust their valuation multiple for the effect of conservatism included in their earnings forecasts when using these forecasts to derive target prices. As a consequence, we find that, for extreme changes in conservatism, the bias in analysts' target prices due to conservatism leads to a distortion of market prices. The evidence highlights the concern that analysts may not appreciate the valuation implications of conservative accounting which could inhibit price discovery.

Social Security Benefit Valuation, Risk, and Optimal Retirement

We develop techniques to estimate the present day value of the future social security benefits of a retiree based upon their chosen date of retirement, the term structure of interest rates, and life expectancy forecasts. These valuation methods are then used to determine the optimal retirement time of a beneficiary given a specific wage history and health profile in the sense of maximizing the present day value of future cashflows. We then examine how a number of risk factors including interest rates, disease diagnosis, and population life table risks impact the current value of future payments. Specifically, we utilize principal component analysis in order to assess interest rate and population life expectancy variation risks. We then examine how such risks range over distinct income and demographic groups and finally summarize future research directions.

A mathematical optimisation approach to modelling the economics of a coal mine

A mathematical model of a multi-product coal mining project is proposed to characterise the economics governing coal production. The model accounts for mining cost variation due to varying production levels, changes in reserves available for extraction by means of a cut-off parameter, as well as lead-time delays between investment and when operations begin. The resulting constrained optimisation problem is solved computationally by maximising the net present value of future cash flows from the mining operation subject to physical limitations. We find that the capital investment problem has greater bearing on the overall project configuration decision and that changes in production capital are made throughout the life of the project while production volumes are largely unchanged.

Foreign Exchange Manipulation and the Equity Returns of Global Banks

We investigate the valuation effects of foreign exchange manipulation for seven systemically important banks that settled with regulators and legal authorities. The seven settlement banks suffer a total market value loss of $48 billion that far exceeds the $10 billion in regulatory and criminal fines. We attribute the difference of $38 billion to a market-imposed reputational penalty, which we define as the expected decline in the present value of future cash flows due to higher regulatory and financing costs and lower revenues. However, only five of the seven settlement banks experience reputational penalties that are higher than the assessed fines. Our evidence suggests that the market responds differentially based on the distinctive circumstances related to each institution’s involvement. We also find evidence of negative valuation effects for other competing global banks that are more pronounced for those banks that have greater systemic importance and control a greater share of the foreign exchange market.

Valuation Implications of Accounting Conservatism

This paper examines whether financial analysts understand the valuation implications of unconditional accounting conservatism when forecasting target prices. While accounting conservatism has a downward effect on reported earnings, it does not have a downward effect on the present value of future cash flows. We examine whether analysts add back the effect of accounting conservatism incorporated in their own earnings forecasts when using these forecasts to estimate target prices. We find that signed target price forecast errors (actual minus forecast) have a significant positive association with the degree of conservatism in earnings, suggesting that on average target prices are biased due to the effect of accounting conservatism. Cross-sectional analysis suggests that more sophisticated analysts undo the effect of conservatism to a greater extent than other analysts, although their target price forecasts also exhibit systematic bias due to conservatism. In additional analyses, we track the analyst's valuation path to understand the mechanism through which unconditional conservatism leads to bias in target prices. We first establish that analysts' earnings forecasts do incorporate the downward effect of accounting conservatism. Based on alternative earnings-based valuation models/heuristics that analysts may use, e.g., the forward P/E and the PEG ratio, we find that analysts fail to add back the effect of accounting conservatism incorporated in their earnings forecasts when deriving their target prices. As a consequence, we find that, for extreme levels of conservatism, the bias in analysts' target prices due to conservatism leads to a distortion of market prices. The evidence highlights the concern that the use of simple valuation heuristics by analysts can inhibit price discovery, especially in the presence of conservative accounting.