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The Cash Flow Model with Float: A New Approach to Deal with Valuation and Agency Problems

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Author Info
Rodolfo Apreda () (Universidad del CEMA)

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Abstract

In this paper we introduce a cash flow model with float to manage core issues in Corporate Finance. The float actually removes current hindrances pervading the standard cash flow model. To start with, we derive the float model and uncover its underlying financial engineering. After that, any investment decision is regarded as a synthetic portfolio made out of a revenue bond financing the investment, and a performance swap acting as a value driver. It is within the performance swap where the float lies and enhances value. Furthermore, extension to valuation is provided taking advantage of the former portfolio approach. Next, the float complex structure is displayed to proceed towards its sources and uses of cash flows. Last of all, we expand upon a normative model which makes the most of the float and spells out how an accountability precept should be functional in redressing agency problems.

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Publisher Info
Article provided by Universidad del CEMA in its journal Journal of Applied Economics.

Volume (Year): II (1999)
Issue (Month): (November)
Pages: 247-279
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Handle: RePEc:cem:jaecon:v:2:y:1999:n:2:p:247-279

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Related research
Keywords: Cash Flow Float; Agency Problems; Arbitrage; Performance Swap; Revenue Bond;

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Find related papers by JEL classification:
G30 - Financial Economics - - Corporate Finance and Governance - - - General
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Justin Yifu Lin & Guofu Tan, 1999. "Policy Burdens, Accountability, and the Soft Budget Constraint," American Economic Review, American Economic Association, vol. 89(2), pages 426-431, May. [Downloadable!] (restricted)
  2. Howton, Shawn D & Howton, Shelly W & Perfect, Steven B, 1998. "The Market Reaction to Straight Debt Issues: The Effects of Free Cash Flow," Journal of Financial Research, Southern Finance Association and Southwestern Finance Association, vol. 21(2), pages 219-28, Summer.
  3. Aswath Damodaran, 1999. "Value Creation and Enhancement: Back to the Future," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-018, New York University, Leonard N. Stern School of Business-. [Downloadable!]
  4. Rodolfo Apreda, 1999. "A Corporate Finance Cash Flow model with Float," CEMA Working Papers: Serie Documentos de Trabajo. 142, Universidad del CEMA. [Downloadable!]
  5. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May. [Downloadable!] (restricted)
  6. Mann, Steven V & Sicherman, Neil W, 1991. "The Agency Costs of Free Cash Flow: Acquisition Activity and Equity Issues," Journal of Business, University of Chicago Press, vol. 64(2), pages 213-27, April. [Downloadable!] (restricted)
  7. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October. [Downloadable!] (restricted)
  8. Anderson, Ronald W & Sundaresan, Suresh, 1996. "Design and Valuation of Debt Contracts," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 9(1), pages 37-68. [Downloadable!] (restricted)
  9. Smith, Clifford Jr. & Warner, Jerold B., 1979. "On financial contracting : An analysis of bond covenants," Journal of Financial Economics, Elsevier, vol. 7(2), pages 117-161, June. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Rodolfo Apreda, 2002. "The Governance Slack Model. A Cash Flow Approach for the Budgeting and Accountability of some Corporate Governance Issues," CEMA Working Papers: Serie Documentos de Trabajo. 212, Universidad del CEMA. [Downloadable!]
  2. Rodolfo Apreda, 2008. "Who is the ultimate master of contractual, regulatory, discretionary and residual cash flows? An answer from the standpoint of corporate governance," CEMA Working Papers: Serie Documentos de Trabajo. 368, Universidad del CEMA. [Downloadable!]
  3. Rodolfo Apreda, 2002. "How corporate governance and globalization can run afoul of the law and good practices in business: The Enron's disgraceful affair," CEMA Working Papers: Serie Documentos de Trabajo. 225, Universidad del CEMA. [Downloadable!]
  4. Rodolfo Apreda, 2004. "Corporate Rent-Seeking and the managerial soft-budget constraint," CEMA Working Papers: Serie Documentos de Trabajo. 283, Universidad del CEMA. [Downloadable!]
  5. Rodolfo Apreda, 2003. "THE SEMANTICS OF GOVERNANCE. (The common thread running through corporate, public, and global governance.)," CEMA Working Papers: Serie Documentos de Trabajo. 245, Universidad del CEMA. [Downloadable!]
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