In this article, the traditional cost-volume-profit (CVP) model is expanded to incorporate the cost of capital. Using the principles of activity-based costing, the opportunity cost of invested funds is traced to a product and is used to determine its operating income after taxes less the cost of capital or economic income each period. When a product's economic income over its useful life is discounted to when production will begin, it is equivalent to a product's net present value (NPV) (see Hartman, 2000; Shrieves and Wachowicz, 2001). The NPV equation, or model, developed in this manner is based on accounting, rather than cash flow, variables. Consequently, it provides a framework for performing CVP analysis. As demonstrated in the article, the CVP model incorporating the cost of capi...
WASHINGTON, March 9, 2011 /PRNewswire/ -- As economic confidence increases and as uncertainty about financial regulation abates, it is only a matter of time before CEOs and boards of directors face pressure to invest the cash that they have been holding on the sidelines. Deciding where to make strategic investments will be an important first step. The methods that financial professionals typically use to assess the future performance of strategic investments form the basis of a new study, Current Trends in Estimating and Applying the Cost of Capital, released today by the Association for Financial Professionals (AFP). Despite the importance of understanding whether the present value of cash flows from those investments will exceed their cost, the AFP survey found little consensus among ...
We show how to decompose a firm's beta into its beta of assets-in-place and its beta of growth opportunities. Our empirical results demonstrate that the beta of growth opportunities is greater than the beta of assets-in-place for virtually all industries over all periods of time dating back to 1977. The difference has important implications for determining the cost of capital. For example, when choosing comparables to determine a project beta one should match the growth opportunities of the project with those of the comparable firm. Assuming a 6% market equity risk premium, accounting for growth opportunities alters the project cost of capital by as much as 2% to 3%.
The purpose of this paper was to determine empirically whether adopting the International Financial Reporting Standards by Jordanian companies listed on the Amman Stock Exchange influenced its cost of equity capital over the period 1996-2000 using a Vector Error Correction Model. Expected return, extent of disclosure, financial leverage, and company size used as a proxy for cost of equity capital, disclosure, financial risk, and business risk, respectively. Moreover, Dickey-Fuller and Johansen Cointegartion tests were applied. Another tools used were the variance decomposition and Granger Causality tests. Results indicate that none of the independent variables significantly influenced the cost of equity capital.
This study examines how the Private Securities Litigation Reform Act (PSLRA) affects financial information quality, as reflected in firms' cost of equity capital. We argue that the passage of PSLRA influences the incentives of those involved in the financial reporting process which in turn affects the firms' financial reporting quality. PSLRA replaced joint and several liability with proportionate liability, providing auditing firms with significant relief from litigation. We contend that the reduction in litigation risk for auditors decreased audit quality. PSLRA also made it more difficult for investors to sue firms for fraud which we argue reduces incentives of managers to report information truthfully. Using the cost of equity capital to proxy for financial information quality, we f...
The idea of the "cost of capital" is fundamental to what managerial finance and accounting professionals do, directly or indirectly, as part of their participation on cross-functional decision teams. They need to understand and apply techniques for estimating the cost of capital for long-term capital budgeting: 1. merger and acquisition analysis, 2. use of Economic Value Added (EVA) as a firm-wide financial performance indicator, 3. incentive systems for financial control, using residual income for evaluating financial performance, 4. equity valuation analyses, 5. and accounting for purchased goodwill. This study offers readers an overview of theoretical and empirical issues involved in estimating a firm's weighted average cost of capital (WACC), and it reviews and applies several metho...
ver las páginas en versión mobile | web
ver las páginas en versión mobile | web
© Copyright 2012, vLex. All Rights Reserved.
Contents in vLex United States
Explore vLex
For Professionals
For Partners
Company
Other interesting searches:
Ajax Magnethermic Corporation | 101 | prevention of aids | Ismael Rodríguez | dyestuffs manufacturers association of india | livraison à domicile | Acuerdos anticipados de precios | Valutazione del personale | Agence fonciere et technique de la region parisienne | ponzeletti piero
