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on Corporate Finance |
| By: | Ignacio Vélez-Pareja; Joseph Tham; Viviana Fernández |
| Abstract: | Abstract: In the standard Weighted Average Cost of Capital (WACC) applied to the free cash flow (FCF), we assume that the cost of debt is the market, unsubsidized rate. With debt at the market rate and perfect capital markets, debt only creates value in the presence of taxes through the tax shield. In some cases, the firm may be able to obtain a loan at a rate that is below the market rate. In a previous work, we showed how to adjust the WACC in the presence of a subsidy and no taxes. There, we showed that plugging the lower (subsidized) cost of debt into the WACC formula is not the correct approach to measuring the value creation due to the subsidy. With subsidized debt and taxes, there would be a benefit to debt financing, and the unleveraged and leveraged values of the cash flows would be unequal. The benefit of lower tax savings are offset by the benefit of the subsidy. These two benefits have to be introduced explicitly. How would we adjust the WACC to take account of the subsidized debt? And how would we adjust the expression for the required return to leveraged equity? In this paper, using a multiple period example we present the adjustments to the WACC with subsidized debt and taxes. We demonstrate the analysis for both the WACC applied to the FCF and the WACC applied to the capital cash flow (CCF). We use the calculation of the Adjusted Present Value, APV, to consider both, the tax savings and the subsidy. We show how all the methods match. |
| Keywords: | Adjusted Present Value, APV, |
| JEL: | D61 |
| Date: | 2005–03–08 |
| URL: | http://d.repec.org/n?u=RePEc:col:000135:001133&r=cfn |
| By: | Guillermo A. Calvo; Alejandro Izquierdo; Rudy Loo-Kung |
| Abstract: | Sudden Stops are associated with increased volatility in relative prices. We introduce a model based on information acquisition to rationalize this increased volatility. An empirical analysis of the conditional variance of the wholesale price to consumer price ratio using panel ARCH techniques confirms the relevance of Sudden Stops and potential balance-sheet effects as key determinants of relative-price volatility, where balance-sheet effects are captured by the interaction of a proxy for potential changes in the real exchange rate (linked to the degree of external leverage of the absorption of tradable goods) and a measure of domestic liability dollarization. |
| JEL: | F31 F32 F34 F41 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11492&r=cfn |
| By: | Ignacio Vélez-Pareja; Joseph Tham |
| Abstract: | Es ampliamente conocido que si el endeudamiento es constante en el tiempo, entonces el costo del patrimonio, Ke, y el costo promedio de capital CPPCFCL también es constante. En otras palabras, no es correcto usar un CPPCFCL constante para descontar el flujo de caja libre FCL, si el endeudamiento cambia en el tiempo. Sin embargo, es muy común, tanto en la práctica, como en la literatura, encontrar analistas y autores que de manera inconsistente usan un CPPCFCL para descontar el FCL aunque el endeudamiento no sea constante. En esta nota pedagógica utilizamos un ejemplo numérico sencillo para ilustrar cómo modelar los flujos de caja que sean consistentes con ese endeudamiento. En el ejemplo se verifica la consistencia con dos principios básicos: la conservación de los flujos de caja y la conservación de los valores. |
| Keywords: | CPPC para el Flujo de caja libre |
| JEL: | D61 |
| Date: | 2005–06–28 |
| URL: | http://d.repec.org/n?u=RePEc:col:000135:001136&r=cfn |
| By: | Paolo Angelini (Bank of Italy, Economic Research Department); Andrea Generale (Bank of Italy, Economic Research Department) |
| Abstract: | We address the question in the title using survey-based measures of financial constraints, as opposed to the proxies typically used in the literature. We find that in our dataset of Italian firms, those declaring to be financially constrained are smaller and younger than the others. However, the size distribution of non constrained firms is significantly skewed, and virtually overlaps with the FSD for the entire sample. Similar conclusions are drawn from the analysis of a large subsample comprising very young firms. These results are broadly confirmed using several non survey-based proxies of financial constraints, and over a second large sample including firms from OECD and non OECD countries. The analysis of the latter dataset suggests that financial constraints are a relatively more serious problem in developing countries. We conclude that financial constraints cannot be the main determinant of the FSD evolution over time, especially in financially developed economies. |
| Keywords: | firm size distribution, financial constraints. |
| JEL: | L11 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_549_05&r=cfn |
| By: | Fernando Rubio (FERNCAPITAL S.A.) |
| Abstract: | This paper explain, analyze and apply in an example the original paper developed by Kopprasch, Boyce, Koenigsberg, Tatevossian, and Yampol (1987) from The Salomon Brothers Inc. Bond Portfolio Analysis Group. Please, be aware. This paper is for educational issues only. There is a Spanish version in EconWPA. |
| Keywords: | Salomon Brothers, bond portfolio, duration and convexity, effective duration, valuation, callable and non callable bond |
| JEL: | G10 G15 G21 G32 |
| Date: | 2005–07–20 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0507019&r=cfn |
| By: | Hendrik Hakenes (Max Planck Institute for Research on Collective Goods, Bonn, Germany); Isabel Schnabel (Max Planck Institute for Research on Collective Goods, Bonn, Germany) |
| Abstract: | This paper discusses the relationship between bank size and risk-taking under Pillar I of the New Basel Capital Accord. Using a model with imperfect competition and moral hazard, we find that small banks (and hence small borrowers) may profit from the introduction of an internal ratings based (IRB) approach if this approach is applied uniformly across banks. However, the banks’ right to choose between the standardized and the IRB approaches unambiguously hurts small banks, and pushes them towards higher risk-taking due to fiercer competition. This may even lead to higher aggregate risk in the economy. |
| Keywords: | Basel II, IRB approach, bank competition, capital requirements, SME financing |
| JEL: | G21 G28 L11 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2005_6&r=cfn |
| By: | EVA RAQUEL PORRAS (Instituto de Empresa) |
| Abstract: | There is a general consensus that expected returns are notoriously difficult to predict for many reasons, including modeling and econometric problems. The bubble and contagion literature proposes fundamentals and contagion proxies as explanatory of financial asset´s price changes. This paper uses mean and semiparametric methods to analyze the explanatory value of some of these variables. The goal of this study is to determine which variables have higher explanatory value as well as their differential impact throughout the distribution of returns. The findings suggest that none of the twelve different models used to proxy fundamentals have any explanatory value for price changes. |
| Keywords: | Bubbles, Panel data, Contagion, Semiparametric methods, Financial asset prices, Quantile regression |
| Date: | 2004–06 |
| URL: | http://d.repec.org/n?u=RePEc:emp:wpaper:wp04-17&r=cfn |
| By: | EVA RAQUEL PORRAS (Instituto de Empresa) |
| Abstract: | In the financial field much of the data available is in panel form. The objective of this paper is to analyze the long run equilibrium relationship between prices and fundamentals while proposing a very simple method of extending time series models to panel data. This method has several characteristics that make it appealing. First, it is simple to implement. Second, it is general in scope. Third, it takes into account arbitrary correlations. Fourth, it does not require making unrealistic assumptions. Our results are supportive of Han´s (1996) in that we do not find cointegration between fundamentals and prices. |
| Keywords: | Panel data, Time series, Fundamentals, Prices |
| Date: | 2004–06 |
| URL: | http://d.repec.org/n?u=RePEc:emp:wpaper:wp04-18&r=cfn |
| By: | Minh Ha-Duong (CIRED - Centre International de Recherche sur l'Environnement et le Développement - http://www.centre-cired.fr - CNRS : UMR8568 - Ecole des Hautes Etudes en Sciences Sociales;Ecole Nationale du Génie Rural des Eaux et des Forêts;Ecole Nationale des Ponts et Chaussées); Nicolas Treich (LEERNA - Laboratoire d'Economie de l'Environnement et des Ressources Naturelles - http://w3.toulouse.inra.fr/leerna/index.html - INRA - Université des Sciences Sociales - Toulouse I) |
| Abstract: | The paper investigates a climate-economy model with an iso-elastic welfare function in which one parameter gamma measures relative risk-aversion and a distinct parameter rho measures resistance to intertemporal substitution. We show both theoretically and numerically that climate policy responds differently to variations in the two parameters. In particular, we show that higher gamma but lower rho leads to increase emissions control. We also argue that climate-economy models based on intertemporal expected utility maximization, i.e. models where gamma = rho, may misinterpret the sensitivity of the climate policy to risk-aversion. |
| Keywords: | risk aversion; equity; discounting; climate change |
| Date: | 2005–07–18 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00000680_v2&r=cfn |
| By: | CONCEPCION MARTIN (Instituto de Empresa) |
| Abstract: | (WPE 05/04 Clave pdf) Las empresas tecnológicas incluyen las de la nueva economÃa y aquellas cuya base de negocio es el I + D. El objetivo de este trabajo es evaluar y determinar cuáles son los métodos más adecuados de valoración para empresas tecnológicas. En concreto, mediante la aplicación práctica a una tecnológica española, se analizan cuáles son los cambios necesarios de realizar para aplicar los métodos de valoración tradicionales a este tipo de empresas y la validez del enfoque de opciones reales como método más adecuado para valorar este tipo de empresas. En este sentido, se concluye que valorar las empresas tecnológicas implica identificar y valorar las opciones reales. |
| Keywords: | Valoración de empresas, Valoración de opciones, Empresas tecnológicas, Opciones reales |
| Date: | 2004–02 |
| URL: | http://d.repec.org/n?u=RePEc:emp:wpaper:wpe04-05&r=cfn |
| By: | LAURA MARTA NUÑEZ (Instituto de Empresa) |
| Abstract: | We use the GRASP procedure to select a subset of financial ratios that are then used to estimate a model of logistic regression to anticipate financial distress on a sample of Spanish firms. The algorithm we suggest is designed "ad-hoc" for this type of variables. Reducing dimensionality has several advantages such as reducing the cost of data acquisition, better understanding of the final classification model, and increasing the efficiency and the efficacy. The application of the GRASP procedure to preselect a reduced subset of financial ratios generated better results than those obtained directly by applying a model of logistic regression to the set of the 141 original financial ratios. |
| Keywords: | Genetic algorithms, Financial distress, Failure, Financial ratios, Variable selection, GRASP, Methaeuristic |
| Date: | 2004–10 |
| URL: | http://d.repec.org/n?u=RePEc:emp:wpaper:wp04-30&r=cfn |