Risk sensitivity indicator as correction factor for cost of capital rate

Michalski, Grzegorz (2012): Risk sensitivity indicator as correction factor for cost of capital rate.

Abstract

Cost of capital rate is a result of risk included in cost of debt rates and cost of equity rates. Generally to estimate cost of capital rates with use of CAPM conception, is used information about general risk indicator, known as beta coefficient and relations between debt and equity rates. Such approach in unmodified version, falsely gives the similar results for enterprises from the same sector and with similar levels of debt to equity relations. In paper is presented risk sensitivity indicator conception which allows to differentiate cost of capital rate between more risk sensitive businesses and less sensitive businesses.

• Item Type: MPRA Paper
• Language: English
• Keywords: risk sensitivity, cost of capital, enterprise value, sensitivity indicator
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill

References

Baumol W.J., The Transactions Demand for Cash: An Inventory Theoretic Approach, Quarterly Journal of Economics”, nr 66, listopad 1952, s. 545-556.

Beck S.E., D.R. Stockman, Money as Real Options in a Cash-in-Advance Economy, Economics Letters, 2005, vol. 87, s. 337-345.

Beranek W., Analysis for Financial Decisions, R. D. IRWIN, Homewood 1963.

Bougheas S., Mateut S., Mizen, P., Corporate trade credit and inventories: New evidence of a trade-off from accounts payable and receivable, Journal of Banking & Finance, vol. 33, no. 2, 2009, s. 300-307.

Cote J.M., C.K. Latham, The Merchandising Ratio: A Comprehensive Measure of Current assets Strategy, Issues in Accounting Education, vol. 14, no. 2, May 1999, s. 255-267.

Damodaran database: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/data.html (last visit: 2012.08.27)

Dudycz database: http://rachunkowosc.com.pl/wskazniki_sektorowe (last visit: 2012.08.27)

Dluhosova, D. et. al., 2006, Finanční řízení a rozhodování podniku: analýza, investování, oceňování, riziko, flexibilita, Ekopress, Prague.

Emery G.W., Positive Theories of Trade Credit, Advances in Current assets Management, JAI Press, vol. 1, 1988, s. 115-130.

Fabozzi F.J., Investment Management, Prentice Hall, Upper Saddle River 1999.

Gallinger G., A. J. Ifflander, Monitoring Accounts Receivable Using Variance Analysis Financial Management, 1986, 69-76.

Gentry J. A. (1988), State of the Art of Short-Run Financial Management, Financial Management, Vol. 17, No. 2, pp. 41-57.

Graber P.J., Assets, The Accounting Review, vol. 23, no. 1, Jan. 1948, s. 12-16.

Holmstrom B., J. Tirole, LAPM: a liquidity-based asset pricing model, Journal of Finance, 2001, vol. 56, s. 1837-1867 {WP6673, National Bureau of Economic Research, Cambridge, 1998}.

Khoury N.T., K.V. Smith, P.I. MacKay, Comparing Current assets Practices in Canada, the United States and Australia, Revue Canadienne des Sciences de l’Administration, vol. 16, no. 1, Mar. 1999, s. 53-57.

Kim C-S., D. C. Mauer, A. E. Sherman, The Determinants of Corporate Liquidity: Theory and Evidence, Journal of Financial and Quantitative Analysis, vol. 33, nr 3, 1998.

Kim Y. H., J. C. Atkins, Evaluating Investments in Accounts Receivable: A Wealth Maximizing Framework, Journal of Finance, vol. 33, nr 2, 1978, s. 403-412.

Levy H., D. Gunthorpe, Introduction do Investments, South-Western College Publishing, Cincinnati 1999.

Lofthouse S., Investment Management, Wiley, Chichester 2005.

Lyn E. O., G. J. Papaioannou, Liquidity and the Financing Policy of the Firm: an Empirical Test, Advances in Capital Management, Londyn 1996, vol. 3, s. 65-83.

Merton R.C, A.F. Perold, Theory of Risk Capital in Financial Firms, w: D.H. Chew, The New Corporate Finance. Where Theory Meets Practice, McGraw-Hill, Boston 1999.

Michalski G. (2008a), Operational risk in current assets investment decisions: Portfolio management approach in accounts receivable. Agricultural Economics–Zemedelska Ekonomika, ISSN: 0139-570X, 54 (1): 12–19

Michalski G. (2008b), Corporate inventory management with value maximization in view, Agricultural Economics-Zemedelska Ekonomika, ISSN: 0139-570X, Volume: 54 Issue: 5 Pages: 187-192.

Michalski G. (2009), Inventory management optimization as part of operational risk management, Economic Computation and Economic Cybernetics Studies and Research, ISSN: 0424-267X, Volume: 43 Issue: 4, Pages: 213-222

Michalski G. (2011), Financial Analysis in the Firm: A Value-Based Liquidity Framework (May 12, 2011). Available at SSRN: http://ssrn.com/abstract=1839367 or http://dx.doi.org/10.2139/ssrn.1839367, pp. 177-262.

Michalski G. (2007), Portfolio management approach in trade credit decision making, Romanian Journal of Economic Forecasting, ISSN 1582-6163, Volume: 8 Issue: 3 Pages: 42-53.

Michalski G. (2008d), Value-based inventory management, Romanian Journal of Economic Forecasting, ISSN 1582-6163, Volume: 9 Issue: 1 Pages: 82-90.

Michalski G. (2012), Financial liquidity management in relation to risk sensitivity: Polish firms case, Quantitative Methods in Economics, Vydavatelstvo EKONOM, ISBN978-80-225-3426-0, Bratislava, p. 141-160.

Michalski G. (2008c), Decreasing operating risk in accounts receivable mangement: influence of the factoring on the firm value, Culik, M., Managing and Modelling of Financial Risk, Pages: 130-137.

MPB (2012): Monitor Polski B, Data source for Polish enterprises, ISSN: 1233-4502, Michalski, Grzegorz Marek, Financial Analysis in the Firm: A Value-Based Liquidity Framework (May 12, 2011). Available at SSRN: http://ssrn.com/abstract=1839367 or http://dx.doi.org/10.2139/ssrn.1839367, pp. 177-262.

Michalski G. (2010), Planning optimal from the firm value creation perspective. Levels of operating cash investment, Romanian Journal of Economic Forecasting, vol: 13 iss: 1 pp.198-214.

Michalski G. (2012), Financial liquidity management in relation to risk sensitivity: Polish firms case, Quantitative Methods in Economics, Vydavatelstvo EKONOM, ISBN978-80-225-3426-0, Bratislava, p. 141-160.

MONEY database: http://www.money.pl/pieniadze/bony/przetargi/ (last visit: 2012.04.27)

Miller M.H., D. Orr, A Model of the Demand for Money by Firms, Quarterly Journal of Economics, 1966, nr 80, s. 413-435.

Miller T. W., B. K. Stone, The Value of Short-Term Cash Flow Forecasting Systems, Advances in Current assets Management, JAI Press Inc., Londyn 1996, vol. 3, s. 3-63.

Mueller F.W., Corporate Current assets and Liquidity, The Journal of Business of the University of Chicago, vol. 26, no. 3, Jul. 1953, s. 157-172.

Myers S. C., R. G. Rajan, The Paradox of Liquidity, Quarterly Journal of Economics 113, nr 3, Cambridge, 1998, s. 733-771.

Nita B., Syntetyczny wskaźnik płynności finansowej w ujęciu statycznym w kontekście zapotrzebowania na kapitał obrotowy netto, PN UE we Wrocławiu nr 182, Wrocław 2011, s. 373.

Opler T., R. Stulz, R. Williamson, The determinants and implications of corporate cash holdings, Journal of Financial Economics, vol. 52, no. 1, 1999, s. 3-46.

Orlicky J., Material Requirements Planning, McGraw-Hill, New York 1975.

Parrino R., D.S. Kidwell, Fundamentals of Corporate Finance, Wiley, New York 2008.

Peterson R., E.A. Silver, Decision Systems for Inventory Management and Production Planning, Wiley, New York 1979.

Plossl G.W., Production and Inventory Control, Principles and Techniques, Prentice Hall, Englewood Cliffs 1985.

Polak P., Sirpal R., Hamdan M., Post-Crisis Emerging Role of the Treasurer, European Journal of Scientific Research, Vol. 86 No. 3, 2012, pp.319-339.

Poteshman A., R. Parrino, M. Weisbach, Measuring Investment Distortions when Risk-Averse Managers Decide Whether to Undertake Risky Project, Financial Management, vol. 34, Spring 2005, s. 21-60.

Riddick L., T. Whited, 2009, The corporate propensity to save, Journal of Finance, 64, 1729-1766.

Reilly F.K., Investments, The Dryden Press, Fort Worth 1992.

Soltes V., 2004, Duration of coupon bonds as a criterion of the price sensibility of bonds with regards to the change of interest rates (Durácia kupónovej obligácie ako kritérium cenovej citlivosti obligácie vzhľadom na zmenu úrokových sadzieb in Slovak), EKONOMICKY CASOPIS, 52/2004(1), pp. 108-114.

Soltes V., 2012, Paradigms of Changes in the 21th Century - Quest for Configurations in Mosaic, Ekonomicky Casopis, 60/2004(4), pp. 428-429.

Stone B. K., The Use of Forecasts and Smoothing in Control - Limit Models for Cash Management, Financial Management, 1972, s. 72-84.

Tobin J., Liquidity Preference as Behavior Toward Risk, Review of Economic Studies, 1958 r. nr 25, s. 65-86.

Zmeskal, Z.; Dluhosova, D., 2009, Company Financial Performance Prediction On Economic Value Added Measure By Simulation Methodology, 27th International Conference on Mathematical Methods in Economics, Mathematical Methods in Economics 2009, p. 352-358.