J. Howard Finch

An option‐based approach for pricing perishable services assets

The concept of option pricing is used to develop an alternative model for pricing services that have a fixed availability and expiration. The binomial option pricing model and abandonment theory are financial models used to demonstrate that the option to cut price contributes positively to a service’s expected profitability. Pricing of hotel rooms is used to demonstrate in a marketing context the use of this option model approach. Airline seats, events, and vacation house rentals are some of the many other alternative applications among consumer services, as broadcast time is a similar example among industrial services.

DISCOUNT RATE CHOICE AND THE APPLICATION OF DURATION FOR CAPITAL BUDGETING DECISIONS

ABSTRACT The duration measure of weighted average life has been applied in the capital budgeting literature as a measure of project liquidity. Duration is superior to payback methods because it considers both the timing and present value of the entire cash flow stream. However, the literature is ambivalent on the choice of discount rate in calculating project duration. For duration to properly serve as a project liquidity measure, the internal rate of return should be used to discount future cash flows. Examples show that using the firms cost of capital to calculate duration fails to measure the time to recover initial project outlays in present value dollars.

The Salary Premium Required for Replacing Management Faculty: Evidence From a National Survey

One of the most important aspects of growing and improving business education is replacing departed faculty members. As the baby-boom generation approaches retirement, the supply of available replacement faculty members is diminishing. The result is a competitive market for replacement faculty that features increasing starting salary levels. In particular, faculty lines that have been occupied for extended time periods need to be marked to market salary levels because annual salary increases rarely keep pace with inflation in the labor market. The authors report the results of a national survey to determine the amount of salary premium required to bring vacated management faculty lines back up to competitive market levels. As business schools struggle to replace retiring and departing faculty, budgets have to account for these premium increases to succeed in an increasingly competitive market for faculty labor.

Effective teaching and use of the constant growth dividend discount model

The appropriate application of the constant growth dividend discount model (DDM) requires an understanding of the fundamental nature of the model and its parameters. It is important that students not only be able to mechanically “plug and chug” the formula, but that they also understand the model’s assumptions, inputs, sensitivity to error and practical limitations. This paper demonstrates that the valuation measure derived from using the DDM is very sensitive to the relationship between the required return on investment (Ks) and the assumed growth rate (g) in earnings and dividends. Examples show that the valuation error increases at an increasing rate when the values of Ks and g converge in the formula. Classroom experience has indicated that students believe and strive to compute a single “correct” valuation of the share price. They should realize that the goal of valuation analysis is to estimate a reasonable range for the intrinsic value of a share price, rather than a single point estimate as often implied by end-of-chapter and exam-type problems using the DDM.

Development and assessment of effective teaching: an integrative model for implementation in schools of business administration

Schools of business administration have experienced a return to the importance of teaching effectiveness as external competitors are vying for declining student populations. To better assess teaching skills and offer suggestions for improvement areas, outlines the role of the key groups involved in assessment of faculty teaching and proposes an integrated development model for implementation.

An evaluation of the productive efficiency of savings and loans

A nonparametric linear programming approach is adopted to measure the productive efficiency of thrift financial institutions. The methodology is applied to a sample of California thrifts in 1989, yielding high mean efficiency scores. High efficiency scores correspond to high levels of operating efficiency. Estimation of a truncated regression model indicates that the major determinants of thrift efficiency are organization form, management style, risk, and firm size. Applying the methodology to a subset of thrifts from 1986 which had failed by 1989 shows technical inefficiency to be a significant indicator of a high probability of failure.

EFFECTIVE BID PRICING FOR UNIT PRICE CONTRACTS

ABSTRACT The task of submitting a competitive bid for the production of a specific product or performance of a particular job is a requirement of firms in many different types of industries, such as construction, manufacturing, and government contracting. In this paper we provide a general model from which to derive a deterministic bid price on a unit price contract. The solution is derived in a capital budgeting context, first for a single bid item contract and then extended to the case of a multiple bid item contract. The specification of a completely general model allows us to examine the sensitivity of the solution to the firms fixed and variable costs. The sensitivity of the bid price is shown to be independent of the level of cost, but highly dependent upon the delivery schedule of the contract. A form of the winners curse dilemma is also examined. We show how the conditional distribution of project net present value (NPV), given a winning bid, is adversely affected, and provide a means to incorpo...