Multiperiod Analysis of a Levered Portfolio

Peccati, Lorenzo

doi:10.1007/978-3-642-76761-6_11

Cited by 15 publications

(9 citation statements)

References 6 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…APV is defined as NPV of the equity cash-flow: 2 This interest rate i must be seen as the interest rate at which equity could be invested outside the project and at which reinvestments will be made for the (net) cash inflows earned by the project. If COEs are variable over the period, the APV approach can be extended to non-flat structure via the GAPV (generalized APV) pionerred by [7]. …”

Section: Financial Leverage and Extra Economic Value Creationmentioning

confidence: 99%

When does financial leverage create economic value?

Kountzakis¹,

Migliavacca²,

Tibiletti³

et al. 2017

imf

View full text Add to dashboard Cite

This paper addresses an overriding question in the theory of capital structure concerning how external financing contributes to economic value creation. Adjusted Present Value rule for capital-investment decisions (see [5], [6]) is used as performance metric of added value. This frame spotlights the contribution to added value attributable to each financing source. We show that levered project and financial leverage add value, at any debt level, if Net Present Value of the investment project and Net Present Value of debt are both positive. However if Net Present Value of debt is negative, external financing destroys economic value and should be taken at the minimum necessary. 554Christos E. Kountzakis et al.

show abstract

Section: Financial Leverage and Extra Economic Value Creationmentioning

confidence: 99%

When does financial leverage create economic value?

Kountzakis¹,

Migliavacca²,

Tibiletti³

et al. 2017

imf

View full text Add to dashboard Cite

show abstract

“…The NPV may be expressed as the present value, at the market rate, of the sum of the single period margins: Edwards and Bell, 1961;Peasnell, 1982;Peccati, 1989;Lohmann, 1988;Pressacco and Stucchi, 1997).…”

Section: -Definitionsmentioning

confidence: 99%

“…Vector * r is an internal return vector (Weingartner, 1966; see also Peccati, 1989). The internal rate of return of the n -period project is just a particular case of internal return vector such that the…”

Section: -Reconciling Rate Of Return and Net Present Valuementioning

confidence: 99%

A Quasi-IRR for a Project Without IRR

2011

View full text Add to dashboard Cite

Discounted cash flows methods such as Net Present Value and Internal Rate of Return are often used interchangeably or even together for assessing value creation in industrial and engineering projects. Notwithstanding its difficulties of applicability and reliability, the internal rate of return (IRR) is commonly used in real-life applications. Among other problems, a project may have no real-valued IRR, a circumstance that may occur in projects which require shutting costs or imply an initial positive cash flow such as a down payment made by a client. This paper supplies a genuine IRR for a project which has no IRR. This seemingly paradoxical result is achieved by making use of a new approach to rate of return (Magni, 2010), whereby any project is associated with a unique return function which maps aggregate capitals into rates of return. Each rate of return is a weighted average of one-period (internal) rates of return, so it is called Average Internal Rate of Return (AIRR). We introduce a twin project which has a unique IRR and the same NPV as the original project's, and which is obtained through an appropriate minimization of the distance between the original project's cash flow stream and the twin project's. Given that the latter's IRR lies on the original project's return function, it represents an AIRR of the original project. And while it is not the IRR of the project, the measure presented is 'almost' the IRR of the project, so it is actually the "quasi-IRR" of the project.

show abstract

“…Residual income is another important notion in accounting. It is extensively used in the accounting and finance literature for two main purposes: on one hand, it being a periodic measure, it is used for performance measurement and incentive compensation (see Solomons, 1965;Grinyer, 1985Grinyer, , 1987Stewart, 1991;Gallo and Peccati, 1993;Rogerson, 1997;Reichelstein, 1997;Martin and Petty, 2000;Arnold and Davies, 2000;Pfeiffer, 2000;Young and O'Byrne, 2001;Mohnen, 2003;Baldenius and Reichelstein, 2005;Mohnen and Bareket, 2007;Pfeiffer and Schneider, 2007); on the other hand, it is used for project/firm valuation (Preinreich, 1936(Preinreich, , 1937(Preinreich, , 1938Peasnell, 1981Peasnell, , 1982aPeccati, 1987Peccati, , 1989Ohlson, 1989Ohlson, , 1995Feltham and Ohlson, 1995;Lundholm and O'Keefe, 2001;O'Hanlon and Peasnell, 2002;Penman, 2007) owing to its lifespan consistency with the NPV: the sum of discounted residual incomes is equal to NPV (see Preinreich, 1936Preinreich, , 1938Lücke, 1955;Edey, 1957;Edwards and Bell, 1961;Bodenhorn, 1964;Peasnell, 1981Peasnell, , 1982aPeccati, 1989;Brief and Peasnell, 1996;Mar...…”

Section: Introductionmentioning

confidence: 99%

Accounting and Economic Measures: An Integrated Theory of Capital Budgeting

Magni

2009

SSRN Journal

View full text Add to dashboard Cite

Accounting measures are traditionally considered not significant from an economic point of view. In particular, accounting rates of return are often regarded economically meaningless or, at the very best, poor surrogates for the IRR, which is held to be "the" economic yield. Likewise, residual income does not enjoy, in general, periodic consistency with the project NPV, so residual income maximization is not equivalent to NPV maximization. This paper shows that the opposition accounting/economic is artificial and, taking a capital budgeting perspective, illustrates the strong (formal and conceptual) connections existing between economic measures and accounting measures. In particular, the average accounting rate of return is the correct economic yield of a project; the traditional IRR is (whenever it exists) only a particular case of it. The average accounting rate generates a decision rule which is logically equivalent to the NPV rule for both accept/reject decisions and project ranking. The paper also shows that maximization of the simple arithmetic mean of residual incomes is equivalent to NPV maximization, owing to its periodic consistency in the sense of Egginton (1995). Such an index may then be used for incentive compensation as well. Moreover, asset pricing may be interpreted in accounting terms as the process whereby the market determines the income impact on the assets' value. As a result, the paper harmonizes the notions of accounting rate of return, internal rate of return, residual income, net present value: they are just different ways of cognizing the same notion. This conciliation stems in a rather natural way from three sources: (i) a fundamental accounting identity, which links income and cash flow in a comprehensive way, (ii) the definition of Chisini mean, (iii) a notion of residual income which takes account of the "real" (comprehensive) cost of capital.

show abstract

Multiperiod Analysis of a Levered Portfolio

Cited by 15 publications

References 6 publications

When does financial leverage create economic value?

When does financial leverage create economic value?

A Quasi-IRR for a Project Without IRR

Accounting and Economic Measures: An Integrated Theory of Capital Budgeting

Contact Info

Product

Resources

About