Thesis (MBA)--Stellenbosch University, 2009. / ENGLISH ABSTRACT: In financial accounting and economics it is important to be in a position to determine replacement costs of assets. These costs are essential for application of inflation accounting , the calculation of Tobin's q ratio, as well as the calculation of the free cash flow (FCF) of a company. However, it proves to be a daunting challenge to calculate especially accurate replacement costs of a company's fixed assets, owing to the considerable effects that inflation, economic lifetime of fixed assets and procurement strategies have on the replacement cost, and consequently on the FCF of a firm . In determining the FCF of a company, it is essential to differentiate between the goals of a company to maintain fixed assets or to expand operations. This split is difficult to ascertain, as few companies in South Africa publish the split. In addition to this, it is important to distinguish between actual required replacement investment (RI) and that part of the RI that has conveniently been postponed. As a consequence, analysis of a company's financial statements to determine replacement costs and subsequent FCF is further complicated. In 2001 , Hall investigated the behaviour of the average age of fixed assets as calculated with the Cutler and Westwick (1973: 17) formula , by developing specific inflation adjustment models. Hall's (2001: 40) study provided insight into some of the factors that might influence the application of the Cutler and Westwick formula for the calculation of the average age of a firm 's fixed assets. This research report developed Hall's models further, and proved that the average age of fixed assets, as used in the determination of replacement cost of a company's fixed assets, could only be applied in zero inflation conditions. In positive inflation periods, the average age of fixed assets as per Cutler and Westwick's formula is understated, resulting in lower estimations of replacement costs. Consequently, the additional depreciation as determined for inflation accounting purposes is understated. In this research report, the models referred to above were developed further to determine the required maintenance (or RI) part of the investing decision relative to depreciation written off. This enabled the modelling of FCF for companies, assuming certain model restrictions, such as constant inflation, evenroll fixed asset replacement and similar economic lifetimes for all fixed assets. However, this only provides some insight into the trends of additional deprecation required for different situations, and cannot be used in practice as comparable practical situations do not exist. This study therefore concludes that the calculation of replacement cost for inflation accounting purposes proves to be a very complex problem. No simple or quick model currently exists for determining the replacement costs of fixed assets and subsequent FCF of a firm. It is recommended that, when determining the replacement costs of fixed assets, the detailed fixed asset register of the firm should be consulted in order to determine the unique asset investment and replacement strategies, as well as the split of the fixed assets in terms of different economic lifetimes. Once this information is available, unique models per company could be developed based on the applicable inflation rates. / AFRIKAANSE OPSOMMING: In finansiële rekeningkunde en ekonomie is dit belangrik om die vervangingswaarde van bates te kan bereken. Hierdie waardes is essensieël vir die toepassing van inflasieboekhouding, die berekening van Tobin se q-verhouding, sowel as die berekening van die vrye kontantvloei (VKV) van 'n maatskappy. Dit blyk egter 'n moeilike taak te wees om veral akkurate vervangingswaardes vir 'n maatskappy se vaste bates te bereken, as gevolg van die groet invloed wat inflasie, die ekonomiese leeftyd van die vaste bates en aankoopstrategieë het op die vervangingswaarde, en gevolglik op die VKV van 'n maatskappy. In die bepaling van die VKV van 'n maatskappy, is dit noodsaaklik om te onderskei tussen die doelwitte van die maatskappy om vaste bates te onderhou of om werksaamhede uit te brei. Hierdie onderskeid is moeilik om te bepaal, aangesien min maatskappye in Suid-Afrika dit publiseer. Ook is dit belangrik om te onderskei tussen werklik benodigde vervangingsinvestering (VVI) en daardie gedeelte van die VVI wat gerieflikheidshalwe uitgestel is. Die ontleding van 'n maatskappy se finansiële state ten einde vervangingswaarde en die daaropvolgende VKV te bereken, word gevolglik verder gekompliseer. In 2001 het Hall die gedrag van die gemiddelde ouderdom van vaste bates ondersoek met behulp van die Cutler en Westwick (1973: 17) formule, deur spesifieke inflasie aangepaste modelle te ontwikkel. Hall (2001 : 40) se studie het insig gebied in sommige van die faktore wat die toepassing van die Cutler en Westwick formule vir die berekening van die gemiddelde ouderdom van 'n maatskappy se vaste bates kan beïnvloed. Hierdie navorsingsverslag ontwikkel Hall se modelle verder en bewys dat die gemiddelde ouderdom van vaste bates, soos gebruik in die beraming van die vervangingswaarde van 'n maatskappy se vaste bates, net toegepas kan word in toestande van nul inflasie. In periodes van positiewe inflasie word die gemiddelde ouderdom, soos bepaal deur die Cutler en Westwick formule, te laag opgegee, met 'n gevolglike laer skatting van vervangingswaarde. Dit lei daartoe dat die addisionele waardevermindering, soos bepaal vir inflasieboekhoudingsdoeleindes, te laag opgegee word. In hierdie navorsingsverslag word die modelle waarna hierbo verwys is verder ontwikkel ten einde die vereiste instandhoudings- (of VVI-) gedeelte van die investeringsbesluit relatief tot waardevermindering te bepaal. Dit maak dit moontlik om die VKV van maatskappye te modelleer, met sekere modelbeperkings wat veronderstel word, soos konstante inflasie, vaste batevervanging volgens 'n harmonies opgeboude masjienpark, en soortgelyke ekonomiese leeftye vir aile vaste bates. Dit bied egter net 'n mate van insig in die patrone van addisionele waardevermindering wat vir verskillende situasies benodig word en kan nie in die praktyk aangewend word nie, aangesien vergelykbare praktiese situasies nie bestaan nie. Hierdie studie kom dus tot die gevolgtrekking dat die berekening van vervangingskostes vir die toepassing van inflasieboekhouding 'n baie komplekse probleem is. Geen maklike of vinnige model bestaan tans vir die bepaling van die vervangingswaarde van vaste bates en die gevolglike VKV van 'n maatskappy nie. Daar word aanbeveel dat, wanneer die vervangingswaarde van vaste bates bereken word, die gedetailleerde vaste bateregister van die maatskappy geraadpleeg moet word ten einde die unieke investering- en vervangingstrategieë, sowel as die skeiding van die vaste bates op grand van verskillende ekonomiese leeftye, te kan bepaal. Sodra hierdie inligting beskikbaar is, kan unieke modelle vir die maatskappy ontwikkel word op grand van die toepaslike inflasiesyfers.

This thesis presents various dynamic models of corporate decisions to address two main issues: investment distortions caused by debt financing and cash flow sensitivities. In the first chapter, four measures of investment distortion are computed. First, the effect of financing frictions is examined. The tax benefit of debt induces firms to increase their debt capacity and to invest beyond the first-best level on average. The cost of this investment distortion outweighs the tax benefit of debt. Second, Myers's (1977) debt overhang problem is examined in a dynamic framework. Debt overhang obtains on average, but not in low technology states. Third, there is no debt overhang problem in all technology states when debt is optimally put in place prior to the investment decision. Finally, the cost of choosing investment after the debt policy is examined. Equity claimants lose value by choosing to invest after their debt is optimally put in place because they do not consider the interaction between their investment choice and the debt financing conditions. The second chapter explores the impact of financial constraints on firms' cash flow sensitivities. In contrast to Fazzari, Hubbard, and Petersen (1988), cash flow sensitivities are found to be larger, rather than smaller, for unconstrained firms than for constrained firms. Then, why is investment sensitive to cash flow? In the two models examined in the second chapter, the underlying source of investment opportunities is highly correlated with cash flows. Investment may be sensitive to cash flow fluctuations simply because cash flows proxy for investment opportunities. This leaves two important questions. Can this chapter suggest a better measure of investment opportunities than Tobin's Q? Not a single measure for both the unconstrained and constrained firm models. Can this chapter suggest an easily observable measure of financial constraint? Yes: large and volatile dividend-to-income ratios.

This thesis presents various dynamic models of corporate decisions to address two main issues: investment distortions caused by debt financing and cash flow sensitivities. In the first chapter, four measures of investment distortion are computed. First, the effect of financing frictions is examined. The tax benefit of debt induces firms to increase their debt capacity and to invest beyond the first-best level on average. The cost of this investment distortion outweighs the tax benefit of debt. Second, Myers's (1977) debt overhang problem is examined in a dynamic framework. Debt overhang obtains on average, but not in low technology states. Third, there is no debt overhang problem in all technology states when debt is optimally put in place prior to the investment decision. Finally, the cost of choosing investment after the debt policy is examined. Equity claimants lose value by choosing to invest after their debt is optimally put in place because they do not consider the interaction between their investment choice and the debt financing conditions. The second chapter explores the impact of financial constraints on firms' cash flow sensitivities. In contrast to Fazzari, Hubbard, and Petersen (1988), cash flow sensitivities are found to be larger, rather than smaller, for unconstrained firms than for constrained firms. Then, why is investment sensitive to cash flow? In the two models examined in the second chapter, the underlying source of investment opportunities is highly correlated with cash flows. Investment may be sensitive to cash flow fluctuations simply because cash flows proxy for investment opportunities. This leaves two important questions. Can this chapter suggest a better measure of investment opportunities than Tobin's Q? Not a single measure for both the unconstrained and constrained firm models. Can this chapter suggest an easily observable measure of financial constraint? Yes: large and volatile dividend-to-income ratios. / Business, Sauder School of / Graduate

In this study seventeen various relationships between yields of three-month, six-month, and twelve-month maturity negotiable CD's and U.S. Government T-Bills were analyzed to find a leading indicator of short-term interest rates. Each of the seventeen relationships was tested for correlation with actual three-, six-, and twelve-month yields from zero to twenty-six weeks in the future. Only one relationship was found to be significant as a leading indicator. This was the twelve-month yield minus the six-month yield adjusted for scale and accumulated where the result was positive. This indicator (variable nineteen in the study) was further tested for usefulness as a trend indicator by transforming it into a function consisting of +1 (when its slope was positive), 0 (when its slope was zero), and -1 (when its slope was negative). Stage II of the study consisted of constructing a computer-aided model employing variable nineteen as a forecasting device. The model accepts a week-by-week minimum cash balance forecast, and the past thirteen weeks' yields of three-, six-, and twelve-month CD's as input. The output of the model consists of a cash time availability schedule, a numerical listing of variable nineteen values, the thirteen-week history of three-, six-, and twelve-month CD yields, a plot of variable nineteen for the next thirteen weeks, and a suggested investment strategy for cash available for investment in the current period.

This research investigates the complementary value of a statement of cash flows (SCF) in a set of published financial statements. Selected accounting studies and selected parts of communication theory are used to argue the case for treating an SCF as a primary financial statement. Ideas adapted from communication theory are also used to decide key issues involved in developing an SCF. Specifically, the study selects a direct rather than a reconciling format for an SCF; it also defines cash to include currency, bank accounts, and marketable securities and exclude claims to cash such as notes and accounts receivable. The definition of cash limits cash flow to strict receipts and disbursements; it excludes constructive receipts and disbursements.

by Yu Ying Choi Alan Abel. / Bibliography: leaves 72-73 / Thesis (M.B.A.)--Chinese University of Hong Kong, 1985