Risk-Adjusted Discount Rates and Projects of Unequal Lives

When evaluating mutually exclusive projects of unequal lives and with differing risk, standard approaches such as the constant chain of replacement, lowest common multiple and equivalent annual value techniques are usually applied. In using these techniques to rank projects, a critical issue is the manner in which uncertainty in the cashflows is resolved through time. We explore the applicability of net present value techniques to the problem of valuing assets with unequal lives, emphasising the use of equivalent annual value and lowest common multiple methods, and the correct choice of discount rate. Our results have direct application to practical capital budgeting problems such as choosing the optimum lifespan for a single asset, choosing between assets with different lifespans, and deciding whether to "run an asset for another year".     

Forecasting Medical Net Discount Rates

Determining the present value of future medical costs is an important issue for a variety of public and private entities. This article examines the time‐series properties of medical net discount rates and considers the implications for forecasting. The article provides evidence that the standard autoregressive moving average forecasting model may be improved by modeling the time‐varying volatility characteristics of the medical net discount rates.     

Tax-Adjusted Discount Rates with Investor Taxes and Risky Debt

This paper derives a tax-adjusted discount rate formula with a constant proportion leverage policy, investor taxes, and risky debt. The result depends on an assumption about the treatment of tax losses in default. We identify the assumption that justifies the textbook approach of discounting interest tax shields at the cost of debt. We contrast this with an alternative assumption that leads to the Sick (1990) result that these should be discounted at the riskless rate. These two approaches represent polar cases. Each generates its results by using a different simplifying assumption, and we explain what determines the correct treatment in practice. We also discuss implementation of the valuation procedure using the capital asset pricing model.     

Buyout Activity: The Impact of Aggregate Discount Rates

Buyout booms form in response to declines in the aggregate risk premium. We document that the equity risk premium is the primary determinant of buyout activity rather than credit‐specific conditions. We articulate a simple explanation for this phenomenon: a low risk premium increases the present value of performance gains and decreases the cost of holding an illiquid investment. A panel of U.S. buyouts confirms this view. The risk premium shapes changes in buyout characteristics over the cycle, including their riskiness, leverage, and performance. Our results underscore the importance of the risk premium in corporate finance decisions.     

The Term Structure of Implicit Discount Rates in Security Valuation

Abstract:   A reformulation of the residual income model is used to generate estimates of discount rates implicit in UK security prices. The terminal value of the infinite valuation model is incorporated into the coefficient on current earnings. By varying the length of the forecast horizon, different combinations of implicit discount rates are revealed that allow the estimation of time‐variant costs of equity. Results indicate no specific pattern of discount rates, thus revealing neither myopia on short‐term earnings nor excessive optimism on long(er)‐term earnings. Surprisingly, there is weak evidence that if any myopia exists, it is concentrated in larger and lower price‐earnings firms.     

对不同资本结构下的折现率的理解和应用

本文指出企业价值收益法评估中直接法和间接法评估结果产生差异的根本原因在于没有正确运用折现率.作者通过一个案例的详细分析,提出了一种简单的解决之道.采用这种方法就不会出现直接法和间接法评估结果差异的问题.     

Risk-Adjusted Economic Value Analysis

Abstract

The ability of commonly used profitability measures to reflect risk exposure appropriately is evaluated and found lacking. As an alternative, a modern portfolio theory approach, based on utility theory, is recommended. Generalized formulas for calculating risk-adjusted economic values by deriving risk adjustments from certainty equivalents are developed by using the Markowitz expected utility maxim. Practical applications are described. Where appropriate, simplifying assumptions are shown to result in closed-form solutions, thereby reducing the need for extensive, stochastic cashflow simulations. The resulting formulas can be used to measure financial performance on a risk-adjusted basis consistently across different lines of business or to evaluate risk exposures in strategic alternatives.     

A Model of Intertemporal Discount Rates in the Presence of Real and Inflationary Autocorrelations

This paper discusses the pricing of assets in an intertemporal rational-expectations model when real production and inflation evolve according to first-order autocorrelated processes. The focus is on the structure of the various intertemporal discount rates (yields) exhibited by this economy. Yield curves are identified for consumption claims, indexed bonds, and nominally riskless bonds and can be extended to any claim that can be approximated by a (finite) linear combination of such securities. The model demonstrates that, if the average term structure for nominally riskless securities is upward sloping, then the yield curve for consumption (market) claims is downward sloping, suggesting that conventional methods for computing long-term discount rates err by not accounting for maturity factors. The paper also explores the relationship between the intertemporal equilibrium and its embedded single-period equilibria. The single-period risk measures in this economy are derived and shown to be (generally) functions of maturity. A model of nominal bond betas is constructed along these lines. It is shown that bond betas that are increasing functions of maturity do not necessarily imply an upward-sloping term structure.     

The Risk-Adjusted Cost of Financial Distress

Financial distress is more likely to happen in bad times. The present value of distress costs therefore depends on risk premia. We estimate this value using risk‐adjusted default probabilities derived from corporate bond spreads. For a BBB‐rated firm, our benchmark calculations show that the NPV of distress is 4.5% of predistress value. In contrast, a valuation that ignores risk premia generates an NPV of 1.4%. We show that marginal distress costs can be as large as the marginal tax benefits of debt derived by Graham (2000) . Thus, distress risk premia can help explain why firms appear to use debt conservatively.     

Risk-Adjusted Performances of World Equity Indices

This article investigates whether equity indices of twenty-four emerging and twenty-eight developed markets compensate their investors equally after adjusting for total or downside risk, and examines the predictive power of reward-to-risk ratios for expected market returns. We find that when all fifty-two markets are ranked based on their alternative reward-to-risk ratios, almost all of the countries in the top (bottom) quartile are emerging (developed) markets. The pooled means of the reward-to-risk ratios are also significantly higher for emerging markets. Both portfolio and regressions analysis reveal that there is a significantly positive relation between various reward-to-risk metrics and expected market returns.     

The Co-op Discount

Cooperative and condominium housing differ in several ways that might be expected to influence their pricing. Most but not all of these differences argue for a higher valuation for condominiums. Hedonic equations estimated on a national sample indicate that the price differential on the average condo/co-op unit in 1987 was 12%. Condos maintain a price premium under a variety of specifications, although its magnitude depends on the bundle of attributes being priced.     

Modigliani and Miller Again Revisited: The Cost of Capital with Unequal Borrowing and Lending Rates

The financial literature asserts that financial managers must borrow at least to some degree if they are to optimise the value of their companies. This result has been described in the literature as ‘perhaps the single most important result in the theory of corporate finance obtained in the last 30 years’ (Copeland and Weston, 1988, p. 443). Based on US tax systems, the value added to a company by debt has been estimated as high as 35 to 50% of the debt's market value. More recently in this journal, Ashton (1989b) has argued that under the present UK tax system, the theoretical tax advantage afforded by debt should be estimated at no more than 13% of the debt's market value. The contribution of this paper is to draw attention to an aspect of borrowing that has largely escaped attention, but which nevertheless affects the above conclusions: namely, that the market spread between borrowing and lending constitutes a ‘cost’ for corporate borrowing. This paper demonstrates that in the context of the present UK tax system, this ‘cost’ of borrowing is sufficient to nullify entirely the formerly perceived financial tax benefits of corporate borrowing. We conclude that, at present, corporate borrowing could imply a net disadvantage for the valuation of a company's equity by about 6 or 7% of the debt's market value.     

Risk-Adjusted Performance of Mutual Funds: Evidence from China

In this article, we evaluate the performance of mutual funds in China between 2006 and 2014. We first estimate time-varying abnormal returns of each mutual fund using an active peer benchmark-augmented factor pricing model. An index of riskiness is then estimated and used to calculate the augmented performance measure (APM). By construction, the APM separates the managerial premium of the fund from systematic risk premium, so it is better than the economic performance measure. The APM incorporates information beyond the first and second moments of the distribution of fund abnormal return; therefore, it is more informative than the Sharpe ratio.     

Explaining the Diversification Discount

This paper argues that the documented discount on diversified firms is not per se evidence that diversification destroys value. Firms choose to diversify. We use three alternative econometric techniques to control for the endogeneity of the diversification decision, and find evidence supporting the self–selection of diversifying firms. We find a strong negative correlation between a firm's choice to diversify and firm value. The diversification discount always drops, and sometimes turns into a premium. There also exists evidence of self–selection by refocusing firms. These results point to the importance of explicitly modeling the endogeneity of the diversification status in analyzing its effect on firm value.     

Targeting Revisited

Public spending programs aimed at alleviating poverty can eitherbe broadly targeted at categories ofspending or narrowly targetedat types of people. Each approach has benefits and costs tothe poor. It is often claimed that narrow targeting of the poorwill allow governments to reduce pQverty more effectively andat lower cost. But narrow targeting often has hidden costs,and once these costs are considered, the most finely targetedpolicy may not have any more effect on poverty than a broadlytargeted one. Both approaches also have hidden benefits, althoughless is known about their impact. Targeting can help, but itis not a cure-all. Reducing poverty calls for broadly targetedsocial sector spending combined with narrower targeting of cashand in-kind transfers to spec groups. It is also important forgovernments to experiment with schemes that offer better incentives,to carefully monitor the costs and outcomes, and to be flexibleand pragmatic in their policy responses.      

货币政策从紧不打折扣

从紧的货币政策提出后,受到了社会各界的广泛关注和重视。一方面,中央银行抓紧部署落实有关金融宏观调控措施,要求各级行认真执行从紧的货币政策,防止经济增长由偏快转为过热、防止物价由结构性上涨演变为明显通货膨胀。另一方面,市场对从紧货币政策的关注也达到空前程度,众多专家学者、市场人士对如何实施从紧的货币政策都提出了自己的看法,一时间可谓众说纷纭。本文认为,对货币政策工具的关注和分析固然重要,但是,对于此轮宏观调控,我们还需要关注一系列货币政策的体制机制因素,加大货币政策与其他宏观经济政策的配合力度。     

券商佣金折扣定价分析

究其实质，当前券商佣金折扣定价的粗糙与随意均源于对佣金价值折让依据认识的笼统与模糊。因此，对佣金折扣定价的理性分析离不开对佣金折让价值的解构。……     

Discount Point Concessions: Comment

This article comments on a recent article by Asabere and Hoffman. It addresses calculation and econometric measurement issues of their work and offers an explanation for their (anomalous) findings.     

企业价值评估中股权缺乏流通性减值折扣研究

股权缺乏流通性对其本身价值有减值影响这一结论已被一些国外著名研究结论所证实.在国内,目前尚没有这方面的研究理论公开发表.作者通过介绍1999年以来对我国法人股的交易案例的研究,证实缺少流通性对股权有减值影响这一结论在我国同样适用.文中还给出了作者在业务实践经验基础上总结出的估算缺少流通性折扣率的初步估算思路和方法.     

当代全球IPO折价现象及理论综述

所谓IPO折价是指一个股票在首次公开发行(initial public offers)后，第一天的收盘价格远高于发行价格的现象．IPO折价现象并非是中国股票市场或新兴市场所特有的，实际上全世界的股票市场都存在此种现象，仅仅在折价程度上有所区别。表1列出了各国学对不同国家(地区)IPO折价程度的研究结果。