No abstract

Misapplication and misinterpretation of capital budgeting techniques can lead to serious capital allocation and capital structure problems. Mainstream literature suggests at least ten approaches for free cash flow and discount rate estimation (leading to the same net present value -NPV) but their benefits vary a lot. We emphasise the application risks when using these techniques without considering the cost of capital for the whole company, thus leading to value decreasing investment decisions. A comparative analysis with a classical free cash flow to equity (FCFE) and economic value added (EVA) methodology will make a strong case for free cash flow to firm (FCFF) as the most efficient approach. We also shed additional light on the main risks associated with the FCFE technique and project-based weighted average cost of capital (WACC) in the capital budgeting process.

Relying on firm-level panel data from an emerging economy, this study explores the impact of fixed capital expenditure on working capital management practices. When facing insufficient internally generated cash flows and external funds for accommodating capital investments, companies are found to finance capital expenditure by primarily depleting cash reserves and increasing trade payables. Corroborating the postulates of the financing constraints theory, working capital investments are found to be inversely related to the degree of financing constraints, and positively sensitive to operating cash flow fluctuations and availability of external finance. For financially constrained companies, capital expenditures are found to more likely exercise a negative impact on working capital investments. Contributing to the discussion on the nature of business cycles, we document that the negative cash flow shocks are likely to be transmitted to firms' counterparties through the trade credit channel rather than through the reduction of investment demand. The empirical findings also suggest that financial managers fail to properly account for capital expenditures in short-term liquidity planning, which, under conditions of limited access to imperfect capital markets, may induce the recurrence of costly working capital adjustments.

Purpose The literature on project finance appraisal contains several ambiguities mainly concerning the correct method of equity cash flow (ECF) determination. This vagueness can lead to serious misevaluation of these projects. The purpose of this paper is to present and justify a correct method of ECF determination for project finance evaluation. Design/methodology/approach Based on the analysis of the specificity of project finance ventures and the study of existing literature, the authors propose a coherent model of ECF estimation that avoids misevaluating project finance ventures. Findings This paper demonstrates that the potential dividends methodology of ECF estimation, used commonly in the corporate finance world, leads to the erroneous valuation of project finance investments. Moreover, simulations demonstrate that the scale of this misevaluation is an increasing function of the debt covenant duration, the required rate of return, and the investment outlay dispersion over time. The proposed model of proper project finance valuation, despite inconsistency with assumptions of the fair value concept, is best suited for project finance venture appraisal, taking into consideration the inherently specific timing of the ECF. Originality/value This paper rectifies, clarifies, and extends the range of existing solutions for the project finance valuation and the application of the concepts of actual dividends and potential dividends in different valuation contexts. Furthermore, it proposes a simple and coherent method to value project finance ventures. Additionally, it offers evidence of the scale of NPV misevaluation in project finance, which occurs when the potential dividends approach is utilized.

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Fair value concept is widely used in DCF (Discounted Cash Flow) business valuation. One of the main principle of fair value concept is full information symmetry between contracting parties. The assumption enforces specific way of FCF (Free Cash Flow) estimation: all areas of inefficiency of valuated companies should be identified and their effect on free cash flow should be eliminated. The projection of free cash flow thus prepared should reflect the optimum operations of the business. The methodological issues of fair value valuation of inefficient companies are not comprehensibly addressed in the financial and accounting literature. There is easily observable gap between fair value theory and valuation practices. Thus this article is an attempt to answer the question about practical issues in fair value valuation of companies which do not apply value based management rules. It is based on literature review, theory examination and short case studies which present proposed solution for practical problems. Methods of identification and assessment of impact of inefficiencies on the fair value of a business are hereinafter presented and supported with arguments. Terms of use: Documents in EconStor may

Purpose This paper aims to present an iterative algorithm that yields the amount of debt contracting/repayment or equity investment necessary to achieve the target capital structure. The model also helps to estimate the gains in shareholder value that result from financial restructuring process and lead to the optimal leverage ratio. Design/methodology/approach The paper maintains that certain benchmarks – i.e. industry average financial leverage and unlevered beta corrected for cash – make it possible to determine the parameters of the optimal capital structure for the company, so a failure to adjust to the target may result in value destruction. Findings The paper presents an iterative algorithm that yields the amount of debt contracting/repayment or equity investment necessary to achieve the target capital structure. Originality/value The proposed algorithm overcomes the methodological problems of existing approaches to the estimation of shareholder value gained through financial restructuring and implicitly solves the circularity problem in the calculation of the weighted average cost of capital.

This paper presents an innovative model for property portfolio assessment based on the concept of a growth-share matrix. The proposed real estate portfolio matrix uses two primary qualities of properties: their potential to accrue value over the holding period and their ability to generate stable positive cash flows. The aim of the model is to utilise these two dimensions in the assessment of the qualities of individual properties and to identify their subsets to meet preferences of different groups of real estate investors. The concept was developed to provide companies with strategic advice on how to optimise the sales strategy of their non-core property assets. This method can be applied successfully to both commercial and residential properties. The concept is subsequently utilised for the purpose of post-hoc structural analysis of the Polish commercial real estate market. Transaction analysis accentuates the prevalence of core assets in terms of both transaction volume and value. Value-added assets constitute a much smaller market segment but may nevertheless present a good opportunity for portfolio diversification. Speculative assets appear to be scarce, which is characteristic of the current phase of real estate market conjuncture.

PurposeRelying on a unique proprietary Polish office market space database, the paper attempts to quantify the impact of buildings' age on the financial performance of real estate assets.Design/methodology/approachPanel econometric modeling was utilized to disentangle the impact of buildings' functional obsolescence and technical deterioration on their long-term financial performance.FindingsIn line with casual empiricism, our findings show a negative associative link between properties' age and potential lease revenue. The concomitant stickiness of service charges presages a possible long-term deterioration of financial outcomes of real estate investments. While older buildings generally have higher occupancy rates, the absorption rates are found to be negatively affected by the properties' age. On the bright side, the elasticity of vacancy rate with respect to rental rates is found to decrease as buildings get older. Further, the rent differential is confirmed to be more pronounced in higher age properties hinting at an existing potential for price discrimination, which may at least partially compensate for stagnant rents.Originality/valueOur empirical results confirm the properties' age to be a statistically significant factor in shaping the long-term performance of real estate assets, which should be better accounted for in financial projections for real estate developments.