Comparing Growth Rates Used in Discounted Cash Flow Valuations

2021 ◽  
Vol 40 (1) ◽  
pp. 2-12
Author(s):  
Roger J. Grabowski
Keyword(s):  
Cash Flow ◽  
Growth Rates ◽  
Cash Flows ◽  
Business Unit ◽  
Security Analysts ◽  
Discounted Cash Flow ◽  
Earning Growth ◽  
Organic Growth ◽  
The Subject ◽  
Free Cash Flows

Estimating growth in net cash flows is one of the key components in applying the discounted cash flow (DCF) method in valuing any company, reporting unit, or other business unit. This paper explains the underlying assumptions of the DCF method and demonstrates how to compare the most commonly used basis for estimating net cash flows (sometimes referred to as free cash flows), expected organic growth, to historic estimates of growth of the subject company and estimates of earning growth commonly prepared by security analysts.

scholarly journals Cash Flow Accounting: is It Time For Increased Disclosures?

2011 ◽  
Vol 12 (1) ◽  
pp. 47 ◽  
Author(s):  
John E. McEnroe
Keyword(s):  
Cash Flow ◽  
Final Section ◽  
The United States ◽  
Cash Flows ◽  
Financial Accounting ◽  
Financial Accounting Standards Board ◽  
Security Analysts ◽  
Flow Information ◽  
Operating Cash Flow ◽  
Free Cash Flows

Cash flow reporting has attracted increased attention in the United States, especially in the past decade. However, despite the use of per share cash flow information by security analysts, the Financial Accounting Standards Board (FASB) has prohibited its disclosure. This article provides a historical perspective of cash flow accounting in the U.S., as well as a discussion of cash flow advocates. The final section presents arguments for increased disclosures in the area of cash flows, including operating cash flow on a per share basis and a schedule of free cash flows.

scholarly journals Financial optimisation of the scheduling for the multi-stage project

2017 ◽  
Vol 65 (6) ◽  
pp. 899-908
Author(s):  
M. Klimek ◽  
P. Łebkowski
Keyword(s):  
Simulated Annealing ◽  
Cash Flow ◽  
Project Scheduling ◽  
Simulated Annealing Algorithm ◽  
Cash Flows ◽  
Standard Test ◽  
Resource Constrained ◽  
Discounted Cash Flow ◽  
Multi Stage ◽  
Annealing Algorithm

AbstractThe paper analyses the problem of discounted cash flow maximising for the resource-constrained project scheduling from the project contractor’s perspective. Financial optimisation for the multi-stage project is considered. Cash outflows are the contactor’s expenses related to activity execution. Cash inflows are the client’s payments for the completed milestones. To solve the problem, the procedure of backward scheduling taking into account contractual milestones is proposed. The effectiveness of this procedure, as used to generate solutions for the simulated annealing algorithm, is verified with use of standard test instances with additionally defined cash flows and contractual milestones.

scholarly journals Targeting fixed reinvestment rate with nonlinear mechanism: a “strange” path to financial distress

2009 ◽  
Vol 7 (2) ◽  
pp. 311-318
Author(s):  
Safieddine Bouali
Keyword(s):  
Cash Flow ◽  
Financial Distress ◽  
Cash Flows ◽  
Share Repurchases ◽  
Governance Arrangement ◽  
Dynamical Mechanism ◽  
Nonlinear Adjustment ◽  
Adjustment Speed ◽  
Nonlinear Mechanism ◽  
Free Cash Flows

Governance arrangement between shareholders, debtholders and managers fix the reinvestment ratio of profits. Residual earnings will appear as excess cash flow to disgorge in dividend disbursements or share repurchases. However, financial crisis stimulates corporation to express highest aversion both to overinvestment or underinvestment, probably in an identical degree. Besides, dissuasion to commit fraud pushes ownership to select a strong dynamical mechanism adjusting held earnings to the preferred reinvestment rate. Focus? Immediate disbursement of free cash flows. This paper shows that self-imposed discipline targeting fixed reinvestment rate under nonlinear adjustment speed can inject itself a “strange” dynamics to the firm, leading to critical losses and a bankruptcy threat. However, one way to reduce this instability is determining carefully the “normal” cash flow which does not trigger the payout.

scholarly journals Valuation Schools and the Evolution of the Income Approach. An Evaluation of Change Trends

2019 ◽  
Vol 27 (2) ◽  
pp. 66-76
Author(s):  
Ewa Kucharska-Stasiak
Keyword(s):  
Cash Flow ◽  
Financial Reporting ◽  
Relevant Literature ◽  
Market Value ◽  
Cash Flows ◽  
Advantages And Disadvantages ◽  
Eu Legislation ◽  
Income Approach ◽  
The Subject ◽  
Valuation Methodology

Abstract The income approach is the subject of debates conducted by academics and practitioners as one of the most controversial approaches in valuation practice. It is also somewhat differently understood by the three historically shaped valuation schools (US, British and German). This article compares the main assumptions underpinning the income approach’s investment method between the three schools in order to: 1) determine why the assumptions change and in what direction; 2) assess the advantages and disadvantages of explicit cash flows; and 3) evaluate the advisability of incorporating explicit cash flows into Polish valuation methodology. A thesis is formulated that, in Poland, the investment method should use implicit cash flows for estimating the market value of properties. There is a need to include explicit cash flow in university programs, but their use should be limited to valuations undertaken to determine the investment value of a property or the market value of portfolio properties, as well as valuations carried out for the purposes of financial reporting as required by EU legislation (MSSF 13 and MSR 40). The article was prepared based on the review and analysis of the relevant literature.

scholarly journals Interactions between free cash flow, debt policy and structure of governance: Three stage least square simultaneous model approach: evidence from the Tunisian stock exchange

2012 ◽  
Vol 9 (2) ◽  
pp. 21-40 ◽  
Author(s):  
Ben Moussa Fatma ◽  
Jameleddine Chichti
Keyword(s):  
Cash Flow ◽  
Stock Exchange ◽  
Cash Flows ◽  
Free Cash Flow ◽  
Least Square ◽  
Agency Conflicts ◽  
Governance Mechanism ◽  
Free Cash Flows ◽  
Debt Policy ◽  
Simultaneous Model

This research tests the efficiency of the ownership structure and the debt policy as mechanism of resolution of agency conflicts between shareholders and managers due to the problem of overinvestment, in the limitation of the problem of the free cash flow, by estimating three stage least square simultaneous model and on the basis of a sample of 35 non-financial Tunisian listed companies selected for the period 1999–2008. Our results are in favour of the theory of free cash flows of Jensen (1986) that stipulates that the debt policy represents the principal governance mechanism that can limit the risk of free cash flow. However, the ownership concentration and managerial ownership increase the risk of the free cash flow.

scholarly journals Corporate Governance and Firm Free Cash Flows: Evidence from Malaysia

2013 ◽  
Vol 5 (11) ◽  
pp. 531-537
Author(s):  
Razieh Adinehzadeh
Keyword(s):  
Corporate Governance ◽  
Cash Flow ◽  
Audit Committee ◽  
Cash Flows ◽  
Free Cash Flow ◽  
Governance Mechanism ◽  
Data Set ◽  
Corporate Governance Mechanism ◽  
Free Cash Flows ◽  
The Relationship

This study provides view of free cash flow and corporate governance (CG) by addressing the relationship between audit committee characteristics with free cash flow. Specifically, this study explores whether audit committee characteristics are substitutes to control agency problem regarding to free cash flow within Malaysian firms. The data set comprise of 200 firm observations Malaysian companies for four consecutive years, which comprise of 2005 to 2008. The results show that size of audit committee, frequency of audit committee meeting, proportion of audit committee independence is positively associated with level of free cash flow (FCF). The results of study highlight the importance of corporate governance mechanism, in the form of audit committee characteristics, in the management of cash flow.

Aurora Textile Company

2017 ◽  
pp. 1-14
Author(s):  
Kenneth M. Eades ◽  
Lucas Doe
Keyword(s):  
Cash Flow ◽  
Financial Distress ◽  
Textile Industry ◽  
Capital Investment ◽  
Investment Decision ◽  
Flow Analysis ◽  
Cash Flows ◽  
List Type ◽  
Discounted Cash Flow ◽  
Cost Information

This case asks the student to decide whether Aurora Textile Company can create value by upgrading its spinning machine to produce higher-quality yarn that sells for a higher margin. Cost information allows the student to produce cash-flow projections for both the existing spinning machine and the new machine. The cash flows have many different cost components, including depreciation, the number of days of cotton inventory, and the liability costs associated with returns from retailers. The cost of capital is specified in order to simplify the analysis. The analysis has added complexity, however, owing to the troubled financial condition of both the company and the U.S. textile industry, which is in decline as manufacturers migrate to Asia to benefit from lower manufacturing costs. This begs the question whether management should invest in a declining business or harvest the company by paying out all profits as a dividend to the owners. The case is suitable for students just beginning to learn finance principles, but is also rich enough to use with experienced students and executives. The primary learning points are as follows: The basics of incremental-cash-flow analysis: identifying the cash flows relevant to a capital-investment decision The construction of a side-by-side discounted-cash-flow analysis for a replacement decision How to adapt the NPV decision rule to a troubled or dying industry The effect of financial distress on the NPV calculation The importance of sensitivity analysis to a capital-investment decision

An Evaluation of Chinese Firms' Profitability: 2005–2013

2015 ◽  
Vol 29 (4) ◽  
pp. 799-828 ◽  
Author(s):  
Jing Liu ◽  
James A. Ohlson ◽  
Weining Zhang
Keyword(s):  
Cash Flow ◽  
Balance Sheet ◽  
High Growth ◽  
Cash Flows ◽  
Free Cash Flow ◽  
Sample Period ◽  
Chinese Firms ◽  
Capital Growth ◽  
Free Cash Flows ◽  
The U.S

SYNOPSIS We empirically examine the profitability of leading Chinese firms, benchmarked against comparable U.S. firms, for the period 2005–2013. Return on invested capital (ROIC), which excludes leverage effects on performance, provides the primary metric. Averaged over firms and years, the two sets of firms have similar profitability, about 11 percent annually. Decomposing ROIC into free cash flow yield and invested capital growth, we show that the same ROIC has very different compositions: while the Chinese firms have high growth and negative free cash flows, the U.S. firms have low growth and positive free cash flows. Due to balance sheet conservatism, we infer that Chinese (U.S.) firms' free cash flow yields and the resulting ROICs have been biased downward (upward). After correcting for the bias, we show that Chinese firms have much higher profitability than their U.S. counterparts: 15.1 percent versus 8.1 percent. This result is driven by the abundance of growth opportunities in China in our sample period. When we control for the growth rates, we find U.S. firms have been more “efficient” in generating more free cash flows than Chinese firms.

scholarly journals Should The CEO Also Be Chairman Of The Board?

2011 ◽  
Vol 2 (7) ◽  
Author(s):  
Richard H. Fosberg
Keyword(s):  
Agency Theory ◽  
Cash Flows ◽  
Opportunistic Behavior ◽  
Font Size ◽  
Board Chair ◽  
Empirical Results ◽  
Leadership Structure ◽  
The Subject ◽  
Administrative Expenses ◽  
Free Cash Flows

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt; tab-stops: .5in;"><span style="font-family: &quot;Times New Roman&quot;,&quot;serif&quot;; mso-bidi-font-style: italic;"><span style="font-size: x-small;">For some time, practitioners and academics have been trying to determine whether it is better for a company's shareholders to allow the CEO of the company to also be Chairman of the Board (a unitary leadership structure) or whether another person (an independent director) should hold the board Chair position (a dual leadership structure)<span style="mso-spacerun: yes;">&nbsp;&nbsp; </span>Not surprisingly, most executives believe one person should hold both positions while academics hold mixed views on the subject.<span style="mso-spacerun: yes;">&nbsp; </span>The empirical results presented in this study suggest that a dual leadership structure is superior for most firms because it allows the board to better control the opportunistic behavior of the firm's managers.<span style="mso-spacerun: yes;">&nbsp; </span>Specifically, as agency theory predicts, dual leadership firms pay lower compensation to their CEOs, have lower selling, general, and administrative expenses, use more debt in their capital structures, pay out more of their free cash flows to investors, and are more profitable than unitary leadership firms.<span style="mso-spacerun: yes;">&nbsp; </span>Each of these results indicates less opportunistic behavior by the managers of dual leadership firms.</span></span></p>

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