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

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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.

Suggested Citation

  • Rodolfo Apreda, 1999. "The Cash Flow Model with Float: A New Approach to Deal with Valuation and Agency Problems," Journal of Applied Economics, Universidad del CEMA, vol. 2, pages 247-279, November.
  • Handle: RePEc:cem:jaecon:v:2:y:1999:n:2:p:247-279
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    File URL: http://www.cema.edu.ar/publicaciones/download/volume2/apreda.pdf
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    References listed on IDEAS

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    1. Guofu Tan & Justin Yifu Lin, 1999. "Policy Burdens, Accountability, and the Soft Budget Constraint," American Economic Review, American Economic Association, vol. 89(2), pages 426-431, May.
    2. Rodolfo Apreda, 1999. "A Corporate Finance Cash Flow model with Float," CEMA Working Papers: Serie Documentos de Trabajo. 142, Universidad del CEMA.
    3. Mann, Steven V & Sicherman, Neil W, 1991. "The Agency Costs of Free Cash Flow: Acquisition Activity and Equity Issues," The Journal of Business, University of Chicago Press, vol. 64(2), pages 213-227, April.
    4. 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.
    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 323-329, May.
    6. Anderson, Ronald W & Sundaresan, Suresh, 1996. "Design and Valuation of Debt Contracts," Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 37-68.
    7. 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-.
    8. 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;Southwestern Finance Association, vol. 21(2), pages 219-228, Summer.
    9. Mark S. Carey & Stephen D. Prowse & John Rea, 1993. "Recent developments in the market for privately placed debt," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Feb, pages 77-92.
    10. 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.
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    Keywords

    Cash Flow Float; Agency Problems; Arbitrage; Performance Swap; Revenue Bond;

    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; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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