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1 – 10 of over 141000Marc Schauten, Rudolf Stegink and Gijs de Graaff
The purpose of this paper is to determine the required return of intangible assets for eight different business sectors by means of an empirical study of companies from the US…
Abstract
Purpose
The purpose of this paper is to determine the required return of intangible assets for eight different business sectors by means of an empirical study of companies from the US Standard & Poor's 500 index. The resulting required return is subsequently compared with proxies for the required return on intangible assets used in practice, such as the weighted average cost of capital (WACC).
Design/methodology/approach
To determine the discount rate of the intangible assets the paper applies the weighted average return on assets method (weighted average return on assets (WARA) method). The paper finds the return on intangible assets (RIA) by setting the WARA equal to the WACC and solves the equation for RIA.
Findings
For all the identified sectors, the RIA is higher than the WACC. It is also shown that this return is higher than the levered or unlevered cost of equity of the company as a whole. In six of the eight sectors, the levered cost of equity appears to be the best proxy for the required return on intangible assets.
Practical implications
The paper shows how the required return on intangible assets can be estimated. The required return is needed for discounted cash flow valuations of intangible assets.
Originality/value
This paper adjusts the WARA method applied by Smith and Parr. In contrast to Smith and Parr, the tax shield is included as a separate asset in the model. Consequently, the WACC before tax is used instead of the WACC after tax.
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Sees 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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David DeBoeuf, Hongbok Lee, Don Johnson and Maksim Masharuev
The purpose of this paper is to contribute to financial managers’ capital budgeting decision-making processes by proposing a new paradigm of capital investment appraisal. The…
Abstract
Purpose
The purpose of this paper is to contribute to financial managers’ capital budgeting decision-making processes by proposing a new paradigm of capital investment appraisal. The expected return, required return structure of the proposed purchasing power return (PPR) methodology eliminates the many flaws associated with the competing internal rate of return (IRR) and modified IRR (MIRR) techniques.
Design/methodology/approach
The authors provide a new framework for examining long-term investment projects through a percentage return prism. Unlike that of IRR and MIRR, mathematical consistency with net present value (NPV) is a design requirement.
Findings
PPR eliminates the many flaws found in the IRR and MIRR methodologies, is mathematically consistent with NPV, and identifies positive-NPV investments forecasted to reduce the company’s purchasing power. These projects are acceptable under NPV, but flagged for additional review and potential rejection. Created to examine projects on a percentage return basis, PPR employs market-based inflation rates to convert all cash flows into constant purchasing power units of measure. From these units, an expected real return is estimated and compared to the project’s inflation-adjusted required return, resulting in an accept/reject decision consistent with that of NPV.
Originality/value
The proposed PPR is a new paradigm of capital investment appraisal that eliminates the many problems found in the IRR and MIRR techniques, is mathematically consistent with the NPV method, and helps financial decision makers examine investment projects on an expected percentage return basis. PPR also flags for further review projects expected to actually reduce the company’s purchasing power.
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Between 1981 and 1994, the UK commercial property market (IPD) delivered a total return of 9.9 per cent each year, 4.2 per cent each year in real terms. Over the same period, the…
Abstract
Between 1981 and 1994, the UK commercial property market (IPD) delivered a total return of 9.9 per cent each year, 4.2 per cent each year in real terms. Over the same period, the real return on UK equities and UK gilts was 11.6 per cent and 6.9 per cent respectively, it is important to account for the poor performance of property. Other than a model which attributes performance to income return and capital return, there are few models that attempt to account for this. This model is simply descriptive. The responsiveness of the return on commercial property to inflation is crucial to pension funds, the liabilities of which are often wage‐linked. Establishes auto‐regressive expectations of real ERV growth and inflation. Presents a model of the simulated lease structure of the IPD. States the main cause of the under‐performance was the increase in the required return on property over the period. Between 1980 and 1994, long‐term expectations of inflation fell. Concludes by stating the existence of over‐rented properties, after the decline in rents in the early 1990s, had a large impact on he relative influence of inflation and real ERV growth. Over‐renting increases the impact of unexpected inflation and changes in expected inflation and reduces the impact of unexpected real ERV growth and changes in expected real ERV growth. In fact, the impact of unexpected inflation in an over‐rented environment is bigger than the impact of unexpected real ERV growth.
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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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The purpose of this paper is to discuss the principal measures of performance used in property and other investment types. In particular, the briefing will explore the…
Abstract
Purpose
The purpose of this paper is to discuss the principal measures of performance used in property and other investment types. In particular, the briefing will explore the relationship of the expected IRR with the initial return, highlighting the role of growth in the investment dynamic.
Design/methodology/approach
This education briefing is an overview of investment growth models with worked examples.
Findings
The analysis of property growth models is akin to the Fisher and Gordon growth models used in other finance markets.
Practical implications
This comparison of the models can work for all forms of investment. Similarly, instead of looking at the overall return as the measure of comparison (expected vs required), it is possible to work backwards and deduce market expectations and compare these with the investors view on those variables.
Originality/value
This is a review of existing models.
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Dale Domian, Rob Wolf and Hsiao-Fen Yang
The home is a substantial investment for most individual investors but the assessment of risk and return of residential real estate has not been well explored yet. The existing…
Abstract
Purpose
The home is a substantial investment for most individual investors but the assessment of risk and return of residential real estate has not been well explored yet. The existing real estate pricing literature using a CAPM-based model generally suggests very low risk and unexplained excess returns. However, many academics suggest the residential real estate market is unique and standard asset pricing models may not fully capture the risk associated with the housing market. The purpose of this paper is to extend the asset pricing literature on residential real estate by providing improved CAPM estimates of risk and required return.
Design/methodology/approach
The improvements include the use of a levered β which captures the leverage risk and Lin and Vandell (2007) Time on Market risk premium which captures the additional liquidity risk of residential real estate.
Findings
In addition to presenting palatable risk and return estimates for a national real estate index, the results of this paper suggest the risk and return characteristics of multiple cities tracked by the Case Shiller Home Price Index are distinct.
Originality/value
The results show higher estimates of risk and required return levels than previous research, which is more consistent with the academic expectation that housing performs between stocks and bonds. In contrast to most previous studies, the authors find residential real estate underperforms based on risk, using standard financial models.
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Examines the role of property in a portfolio investment context.Demonstrates that the return an asset is required to achieve depends onthe variability and correlation of returns…
Abstract
Examines the role of property in a portfolio investment context. Demonstrates that the return an asset is required to achieve depends on the variability and correlation of returns and not simply average returns. Shows that property, as measured by the Jones Lang Wootton Index, should have been included in institutional portfolios using both nominal and real returns, even if the variability of property was more than doubled. Suggests that property portfolios still offer considerable benefits to existing gilt/equity dominated funds in terms of improved risk‐adjusted performance.
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Elena Lasso-Dela-Vega, José Luis Sánchez-Ollero and Alejandro García-Pozo
This study conducts a comparative analysis of the impact of educational mismatch on Spanish wages. This paper aims to focus on the industrial, construction and service sectors at…
Abstract
Purpose
This study conducts a comparative analysis of the impact of educational mismatch on Spanish wages. This paper aims to focus on the industrial, construction and service sectors at three levels of disaggregation: sector, occupation and gender.
Design/methodology/approach
The over-education, required education and under-education (ORU model), was applied to data from the 2018 Spanish Wages Structure Survey conducted by the Spanish National Statistics Institute.
Findings
The industrial sector is the one that best manages over-education by offering the highest returns to each year of over-education. It is also the sector that most values the education of women, particularly those in highly qualified positions.
Originality/value
This study compares the wage effects of educational mismatch in the service, industry and construction sectors. Previous literature has ignored the latter sectors in this field of study, but the results of the present study show that the industrial sectors significantly value and remunerates worker education. Therefore, it may be worthy to focus certain economic and social policies on this sector, to contribute to reducing gender wage gaps and gender employment discrimination in the economy.
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Jack Broyles and Julian Franks
Managerial finance has become a modern professional discipline with a coherent theory and a growing body of statistical research in support of the theory. Finance faculty in…
Abstract
Managerial finance has become a modern professional discipline with a coherent theory and a growing body of statistical research in support of the theory. Finance faculty in leading business schools around the world are now actively engaged in making the modern theory accessible to executive participants in post‐experience educational programmes. What makes the modern theory of finance exciting is the simplicity and the authority with which issues of concern to management today can be resolved. One of the areas of interest where answers to old questions are being found is in the estimation of discount rates or required rates of return for capital projects.