Valuation of Cash Flows with Constant Leverage: Further Insights
It is widely known that if the leverage is constant over time, then the cost of equity and the Weighted Average Cost of Capital (WACC) for the free cash flow, FCF, is constant over time. In other words, it is inappropriate to use a constant WACCFCF to discount the free cash flow (FCF) if the leverage changes over time and some conditions are not satisfied. However, it is common to find analysts who inconsistently use a constant WACCFCF even if the leverage is not constant and the proper conditions are not satisfied. In this teaching note, we use a simple numerical example to illustrate how to modelcash flows that are consistent with constant leverage. We verify the consistency of the example with two basic principles: conservation of cash flows and conservation of values. The note is based on a previous one and includes the procedure to value with constant leverage when some restrictive conditions are not satisfied.
Some Evidence on Financial Distress Costs and Their Effect on Cash Flows
In this work we explore the effect of book value leverage upon some financial indexes, such as real growth, payment terms from suppliers and gross and operating margins. We explore if there is statistical evidence on the influence of the book value leverage level in the financial distress or bankruptcy costs that appear as measured by the worsening of those indexes. Four dependent variableswere explored: gross margin, operating margin, real growth in sales and payment terms from suppliers. In order to estimate the financial distress and bankruptcy costs associated with each dependent variable, logarithmic and semi-logarithmic models were constructed using data panel. We used a balanced sample composed by 644 firms from the commercial Colombian industry, provided by the Superintendence of Societies of Colombia. We also examined an unbalanced sample of 683 firms with Ordinary Least Squares (OLS) analysis. We found that there exists a relationship between book value leverage perceived by the market and gross margin. This allows us to explore the possibility to introduce the financial distress costs in the cash flows. The aim of the study is to explore a model that allows the analyst to include this effect in the forecasted financial statements. When this effect isincluded in the financial statements the free cash flows will be affected and hence the interaction of cash flows, cost of capital (weighted average cost of capital) and firm value calculated with the cash flows will eventually allow determining an optimal capital structure.
Capitalising on Subjectivity: The ‘New Model Worker’ and the Importance of Being Useful
The ever-new buzz words for the ideal worker, such as ‘intrapreneur’ or ‘self-manager’, can be seen as management rhetoric and fashions without major consequences for the labour process. But it can also be maintained that these notions and images shed light on the processes of social construction of the ‘model worker’, that is, the historically variable ideal of workers’ subjectivity and behaviour. It is, for example, quite surprising that few demands are evident for the traditional virtues of work, such as reliability, performance of one’s duties or obedience, in current managerial discourses, although these have been the cornerstones of the work ethic in capitalist societies. Instead, ‘responsible decision makers’, ‘intrapreneurs’, ‘self-managers’ and ‘self-developers’ have entered the scene. In contrast to conventional wisdom, such labels are not reserved for managers or workers in financial services and the like. The discourse embraces virtually every industry and occupation, blurring the differences, in socio-psychological terms, between the board of directors and the shop floor.