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1 – 10 of over 79000Sees the objective of teaching financial management to be to helpmanagers and potential managers to make sensible investment andfinancing decisions. Acknowledges that financial…
Abstract
Sees the objective of teaching financial management to be to help managers and potential managers to make sensible investment and financing decisions. Acknowledges that financial theory teaches that investment and financing decisions should be based on cash flow and risk. Provides information on payback period; return on capital employed, earnings per share effect, working capital, profit planning, standard costing, financial statement planning and ratio analysis. Seeks to combine the practical rules of thumb of the traditionalists with the ideas of the financial theorists to form a balanced approach to practical financial management for MBA students, financial managers and undergraduates.
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Textbooks often portray capital budgeting as a rather mechanical process: Top management decides whether or not to accept a project by requesting an estimate of net present value…
Abstract
Textbooks often portray capital budgeting as a rather mechanical process: Top management decides whether or not to accept a project by requesting an estimate of net present value from its staff and to see if the number is positive or negative. This paper suggests that the textbook net present value rule is not optimal if the competitive market assumption holds. Better decision rules state minimum acceptable safety margins and may take the form of stating a minimum acceptable profitability ratio.
Management implications of net present value computation are investigated in comparison to computation of capital return rate, in the absence of periodic boundary conditions.
Abstract
Purpose
Management implications of net present value computation are investigated in comparison to computation of capital return rate, in the absence of periodic boundary conditions.
Design/methodology/approach
The initial state of experimental forest stands is measured in the field. Further development of the stands is investigated using a growth model.
Findings
The capital return rate strongly depends on cutting limit diameter, whereas net present value (NPV) is insensitive to it. The net present value also is indecisive whether or not frequent further thinnings should be implemented. In the absence of further harvesting, the net present value of growth declines rapidly, as does the capital return rate. With repeated diameter-limit cuttings, the net present value declines even if the capital return rate is retained. After a few decades, the NPV stabilizes even if the capital return rate declines. On stands previously thinned from below, greater NPV is gained without further thinnings, whereas capital return rate requires repeated diameter-limit cuttings.
Research limitations/implications
It appears difficult to formulate management instructions on the basis of NPV computations because of the indecisiveness of the results.
Practical implications
Regardless of the degree of decisiveness, NPV-based management results in losses of capital return.
Originality/value
Net present value of further growth is computed in the absence of periodic boundary conditions, and the outcome is compared with the statistically expected value of capital return rate.
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Allen M. Featherstone, Mykel R. Taylor and Heather Gibson
With the decline of US net farm income from $123.8 billion in 2013 to $71.5 billion forecasted for 2016, concern has developed regarding the future path of agricultural land values…
Abstract
Purpose
With the decline of US net farm income from $123.8 billion in 2013 to $71.5 billion forecasted for 2016, concern has developed regarding the future path of agricultural land values. The purpose of this paper is to examine the relationship between net farm income, cash rents and land values in the state of Kansas and provides insight regarding future land values.
Design/methodology/approach
This study estimates partial adjustment models for cash rent and land values and uses those results to infer long-run capitalization rates and earnings multipliers. These models are used to forecast Kansas land values through 2018 and also the long-run price of farmland given 2016 expectations.
Findings
Land adjusts to changes in Kansas net farm income slowly with a one-year elasticity of 6.7 percent. The long-run elasticity is 96.9 percent which is very close to the 100 percent suggested by the theoretical income capitalization model. The long-run multiplier for income in Kansas is 21.71 which implies a capitalization rate of 4.61 percent. The estimated results suggest that Kansas land values would peak in 2016 and begin to slowly decline. If market conditions were to remain the same, land values would ultimately decrease to $1,171 per acre, a 28 percent decline from current levels.
Originality/value
Declines of the magnitude in estimated land values could negatively affect the financial condition of the sector. Factors such as a change in the long-run capitalization rate or unexpected supply or demand shocks for agricultural commodities globally could certainly alter the long-term prospects. However, current expectations as of March 2016 suggest that farmers will face difficult conditions over the next few years.
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The purpose of this article is to determine the optimal use of collateral in order to maximize the borrower's wealth by reducing the interest rate payments. This analysis is to…
Abstract
Purpose
The purpose of this article is to determine the optimal use of collateral in order to maximize the borrower's wealth by reducing the interest rate payments. This analysis is to shed light on the fundamental question whether good or bad borrowers pledge more collateral.
Design/methodology/approach
The analysis bases on a simple firm value model similar to Merton's but with the additional feature that the borrower can bring in collateral. This article not only presents the case with perfect information between borrowers and lenders but also regards the consequences arising from asymmetric information.
Findings
A bad borrower, who is characterized by higher bankruptcy costs, riskier projects, and a lower contribution to the project value, typically pledges more collateral than a good borrower. These relationships base on the existence of perfect information between borrowers and lenders. If asymmetric information in terms of the project's riskiness or the contribution of the borrower to the project is present, these relationships invert and good borrowers tend to pledge more collateral. As a result, the allocation of information between a borrower and a lender is crucial for the optimal choice of collateral.
Research limitations/implications
This research underlines the potential for firms to add firm value by pledging collateral because collateral reduces interest rates and therefore results in more attractive terms of the loan. On the other hand, further empirical research can be done to verify our theoretical finding that under perfect information bad borrowers pledge more collateral, while under asymmetric information primarily good borrowers use collateral.
Originality/value
This paper introduces a new motive for the use of collateral and explains – in contrast to many other theoretical models – why bad borrowers tend to pledge more collateral.
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This paper examines the appropriate term of the risk free rate to be used by a regulator in price control situations, most particularly in the presence of corporate debt. If the…
Abstract
This paper examines the appropriate term of the risk free rate to be used by a regulator in price control situations, most particularly in the presence of corporate debt. If the regulator seeks to ensure that the present value of the future cash flows to equity holders equals their initial investment then the only choice of term for the risk free rate that can achieve this is that matching the regulatory cycle, but it also requires that the firm match its debt duration to the regulatory cycle. Failure of the firm to do so leads to cash flows to equity holders whose net present value will tend to be negative, and will also inflict interest rate risk upon equity holders. This provides the firm with strong incentives to match its debt duration to the regulatory cycle.
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A tax based on land value is in many ways ideal, but many economists dismiss it by assuming it could not raise enough revenue. Standard sources of data omit much of the potential…
Abstract
Purpose
A tax based on land value is in many ways ideal, but many economists dismiss it by assuming it could not raise enough revenue. Standard sources of data omit much of the potential tax base, and undervalue what they do measure. The purpose of this paper is to present more comprehensive and accurate measures of land rents and values, and several modes of raising revenues from them besides the conventional property tax.
Design/methodology/approach
The paper identifies 16 elements of land's taxable capacity that received authorities either trivialize or omit. These 16 elements come in four groups.
Findings
In Group A, Elements 1‐4 correct for the downward bias in standard sources. In Group B, Elements 5‐10 broaden the concepts of land and rent beyond the conventional narrow perception, while Elements 11‐12 estimate rents to be gained by abating other kinds of taxes. In Group C, Elements 13‐14 explain how using the land tax, since it has no excess burden, uncaps feasible tax rates. In Group D, Elements 15‐16 define some moot possibilities that may warrant further exploration.
Originality/value
This paper shows how previous estimates of rent and land values have been narrowly limited to a fraction of the whole, thus giving a false impression that the tax capacity is low. The paper adds 14 elements to the traditional narrow “single tax” base, plus two moot elements advanced for future consideration. Any one of these 16 elements indicates a much higher land tax base than economists commonly recognize today. Taken together they are overwhelming, and cast an entirely new light on this subject.
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Marco Rogna, Guenter Schamel and Alex Weissensteiner
Hailstorms are a major risk in agriculture. In order to mitigate the negative consequences on farm revenues, in the present paper the authors analyse the choice between insurance…
Abstract
Purpose
Hailstorms are a major risk in agriculture. In order to mitigate the negative consequences on farm revenues, in the present paper the authors analyse the choice between insurance contracts and anti-hail nets. Furthermore, the authors discuss the consequences of anti-hail nets adoption on the actuarial soundness of the insurance market.
Design/methodology/approach
In this paper the authors firstly develop a theoretical model based on expected utility theory to compare the profitability of no-hedging against insurance and anti-hail nets. Subsequently, they test their theoretical model predictions with data of South Tyrolean apple producers.
Findings
The authors find that the benefit of anti-hail nets compared to insurance is an increasing function of the overall risk of hail damages, of the farmers' level of risk aversion and of the worth of the agricultural output.
Practical implications
Given the authors’ findings that anti-hail nets are more profitable for riskier, risk-averse and high-profitable farmers, the diffusion of anti-hail nets could be beneficial for the actuarial soundness of insurance markets.
Originality/value
The model developed in the paper is specifically designed to compare the profitability of different agricultural hedging options and can be easily extended to cover other hazards.
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J. Stuart Wood and Gordon Leitch
Proposed projects whose financing will cause capital structure to change across time cannot be accurately evaluated by the ordinary Weighted Average Cost of Capital‐Net Present…
Abstract
Proposed projects whose financing will cause capital structure to change across time cannot be accurately evaluated by the ordinary Weighted Average Cost of Capital‐Net Present Value technique. The required rate of return on a new project depends on the firm’s capital structure through the effect of capital structure on the required rates of debt and equity suppliers. But the capital structure depends on these required rates, which are themselves functions of capital structure. There is no general analytical solution to this circularity, so the ordinary weighted average cost of capital cannot capture the effects of changing capital structure on the cost of capital, and the computed NPV is not correct: the wealth of the shareholders will change by a different amount, and may have a different sign as well.
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