Plowback in the Constant-Growth DCF Model

IF 0.7 Q4 BUSINESS, FINANCE
James L. Canessa, Gregg A. Jarrell
{"title":"Plowback in the Constant-Growth DCF Model","authors":"James L. Canessa,&nbsp;Gregg A. Jarrell","doi":"10.1111/jacf.12521","DOIUrl":null,"url":null,"abstract":"<p>Valuation experts have recommended using the finance formula equating real growth in net cash flows (g) to the plowback rate (k) times the real return on investment (r) as a more reasonable basis for estimating plowback in the steady-state perpetuity period of the standard value-driver DCF formula. Unfortunately, practitioners make two errors when estimating implied plowback as k = g  ÷ r. The first error is to use the incorrect nominal formula k = G  ÷ R that is still found in finance and valuation textbooks. The second error arises because there are two ways to define plowback in the value-driver DCF model. The problematic traditional definition measures plowback ratio as a function of accounting NOPAT (before it has been transformed into cash NOPAT by deducting incremental working capital), thereby including in the numerator not only net new investment, but also changes in incremental working capital. The authors call this accounting plowback, and show why it is generally inappropriate to estimate implied accounting plowback using the formula k = g  ÷ r. The authors explain in detail why the cash plowback presented in Bradley Jarrell (2008) is generally appropriate for estimating implied plowback and why accounting plowback is more problematic in this application.</p>","PeriodicalId":46789,"journal":{"name":"Journal of Applied Corporate Finance","volume":null,"pages":null},"PeriodicalIF":0.7000,"publicationDate":"2022-09-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Journal of Applied Corporate Finance","FirstCategoryId":"1085","ListUrlMain":"https://onlinelibrary.wiley.com/doi/10.1111/jacf.12521","RegionNum":0,"RegionCategory":null,"ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q4","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
引用次数: 0

Abstract

Valuation experts have recommended using the finance formula equating real growth in net cash flows (g) to the plowback rate (k) times the real return on investment (r) as a more reasonable basis for estimating plowback in the steady-state perpetuity period of the standard value-driver DCF formula. Unfortunately, practitioners make two errors when estimating implied plowback as k = g  ÷ r. The first error is to use the incorrect nominal formula k = G  ÷ R that is still found in finance and valuation textbooks. The second error arises because there are two ways to define plowback in the value-driver DCF model. The problematic traditional definition measures plowback ratio as a function of accounting NOPAT (before it has been transformed into cash NOPAT by deducting incremental working capital), thereby including in the numerator not only net new investment, but also changes in incremental working capital. The authors call this accounting plowback, and show why it is generally inappropriate to estimate implied accounting plowback using the formula k = g  ÷ r. The authors explain in detail why the cash plowback presented in Bradley Jarrell (2008) is generally appropriate for estimating implied plowback and why accounting plowback is more problematic in this application.

恒增长DCF模型的回耕
估值专家建议使用财务公式,将净现金流量的实际增长(g)等同于犁回率(k)乘以实际投资回报率(r),作为标准价值驱动DCF公式在稳态永续期估计犁回率的更合理基础。不幸的是,从业者在估计隐含的投资回报率为k = g ÷ r时犯了两个错误。第一个错误是使用了不正确的名义公式k = g ÷ r,这在金融和估值教科书中仍然可以找到。第二个错误是因为在价值驱动DCF模型中有两种定义回退的方法。有问题的传统定义将犁回率作为会计NOPAT(通过扣除增量营运资本将其转化为现金NOPAT之前)的函数来衡量,从而不仅包括净新投资,还包括增量营运资本的变化。作者将此称为会计回耕,并说明了为什么使用公式k = g ÷ r来估计隐含会计回耕通常是不合适的。作者详细解释了为什么Bradley Jarrell(2008)中提出的现金回耕通常适用于估计隐含回耕,以及为什么会计回耕在这种应用中更有问题。
本文章由计算机程序翻译,如有差异,请以英文原文为准。
求助全文
约1分钟内获得全文 求助全文
来源期刊
自引率
11.10%
发文量
44
×
引用
GB/T 7714-2015
复制
MLA
复制
APA
复制
导出至
BibTeX EndNote RefMan NoteFirst NoteExpress
×
提示
您的信息不完整,为了账户安全,请先补充。
现在去补充
×
提示
您因"违规操作"
具体请查看互助需知
我知道了
×
提示
确定
请完成安全验证×
copy
已复制链接
快去分享给好友吧!
我知道了
右上角分享
点击右上角分享
0
联系我们:info@booksci.cn Book学术提供免费学术资源搜索服务,方便国内外学者检索中英文文献。致力于提供最便捷和优质的服务体验。 Copyright © 2023 布克学术 All rights reserved.
京ICP备2023020795号-1
ghs 京公网安备 11010802042870号
Book学术文献互助
Book学术文献互助群
群 号:481959085
Book学术官方微信