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on Corporate Finance |
| By: | Schmal, Tom |
| Abstract: | Approving capital projects can be one of management’s toughest calls. One reason is while a project's return can be presented quantitatively, eg., IRR, its risks have no comparable metric. The author addresses the problem by showing how to use a Monte Carlo simulation to measure your project’s risk and how to use that risk to find its true, risk-adjusted, cost of capital. In this system, risk is determined by variation in free cash flow. Since every project in your company’s pipeline will have a forecasted free cash flow, every project, including those with financial leverage, can be evaluated using the same economic yardstick. Other benefits include better value projects, better presentation and accurate discount rates for NPV. |
| Keywords: | cost of capital, IRR, NPV, cash flow, Monte Carlo, capital project economics, risk-adjusted return, M-P5, variability, pure play, leverage, hurdle rate. |
| JEL: | D81 G32 |
| Date: | 2015–11–26 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:71100&r=cfn |
| By: | Dóra Siklós (European Stability Mechanism) |
| Abstract: | The main purpose of this paper is twofold. First, it aims to estimate the effect of the tightening of regulatory capital requirements on the real economy during a credit upswing. Second, it intends to show whether applying a countercyclical capital buffer measure, as per the Basel III rules, could have helped decelerate FX lending growth in Hungary, mitigating the build-up of vulnerabilities in the run-up to the global financial crisis. To answer these questions, we use a Vector Autoregression-based approach to understand how shocks affected to capital adequacy in the pre-crisis period. Our results suggest that regulatory authorities could have slowed the increase in lending temporarily. They would not, however, have been able to avoid the upswing in FX lending by requiring countercyclical capital buffers even if such a tool had been available and they had reacted quickly to accelerating credit growth. Our results also suggest that a more pronounced tightening might have reduced FX lending substantially, but at the expense of real GDP growth. The reason is that an unsustainable fiscal policy led to a trade-off between economic growth and the build-up of new vulnerabilities in the form of FX lending |
| Keywords: | FX lending, capital adequacy, bank regulation, counterfactual analysis |
| JEL: | E58 G01 G21 G28 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:stm:wpaper:11&r=cfn |
| By: | Nadarajah Sivathaasan; Searat Ali; Benjamin Liu; Allen Huang |
| Keywords: | Stock liquidity, corporate governance, leverage, high and low liquidity firms |
| JEL: | G32 G34 G12 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:gri:fpaper:finance:201603&r=cfn |
| By: | Flora Bellone (Groupe de Recherche en Droit, Economie et Gestion); Michel Bernini (School of International Studies); Sarah Guillou (OFCE) |
| Abstract: | Does corporate financial structure matter for a firm’s ability to compete in international markets through output quality? This study answers this question by using firm-level export and balance sheet data covering a large sample of French manufacturing exporters over the period 1997–2007. The main result is that there is a negative causal relation between a firm’s leverage and export quality, where quality is inferred from the estimation of a discrete choice model of foreign consumers’ demand. This result is robust across different specifications and estimation techniques. In addition, by estimating investment models we find that the negative impact of leverage on quality is consistent with theories predicting that the agency cost of debt determines suboptimal investment. |
| Keywords: | Capital structure; Investment; Output quality; Exports |
| JEL: | G11 G32 F14 L11 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/14bcgn3ce19ns9gv417qkp04in&r=cfn |
| By: | Marco Botta; Luca Colombo (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore) |
| Abstract: | We investigate the capital structure of a large sample of corporations in 52 countries, focusing on the effects of macroeconomic and institutional characteristics on firms' dynamic behavior. We find that these characteristics affect both the optimal level of leverage and the adjustment process towards it. The speed of adjustment varies significantly with both macroeconomic and institutional conditions for financially unconstrained firms, while it is unaffected for constrained firms. Overall, our results support a complex view of capital structure decisions, where market timing and pecking order arguments affect the short-run, while dynamic trade-off with costly readjustment matters in the long-run. |
| Keywords: | Capital Structure Dynamics, Debt Readjustments, Dynamic Adjustment Models, Macroeconomic Conditions, Speed of Adjustment. |
| JEL: | C23 E44 G32 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:ctc:serie1:def038&r=cfn |