Paweł Mielcarz

The superiority of FCFF over EVA and FCFE in capital budgeting

Misapplication and misinterpretation of capital budgeting techniques can lead to serious capital allocation and capital structure problems. Mainstream literature suggests at least ten approaches for free cash flow and discount rate estimation (leading to the same net present value – NPV) but their benefits vary a lot. We emphasise the application risks when using these techniques without considering the cost of capital for the whole company, thus leading to value decreasing investment decisions. A comparative analysis with a classical free cash flow to equity (FCFE) and economic value added (EVA) methodology will make a strong case for free cash flow to firm (FCFF) as the most efficient approach. We also shed additional light on the main risks associated with the FCFE technique and project-based weighted average cost of capital (WACC) in the capital budgeting process.

Fair value, equity cash flow and project finance valuation: ambiguities and a solution

Purpose The literature on project finance appraisal contains several ambiguities mainly concerning the correct method of equity cash flow (ECF) determination. This vagueness can lead to serious misevaluation of these projects. The purpose of this paper is to present and justify a correct method of ECF determination for project finance evaluation. Design/methodology/approach Based on the analysis of the specificity of project finance ventures and the study of existing literature, the authors propose a coherent model of ECF estimation that avoids misevaluating project finance ventures. Findings This paper demonstrates that the potential dividends methodology of ECF estimation, used commonly in the corporate finance world, leads to the erroneous valuation of project finance investments. Moreover, simulations demonstrate that the scale of this misevaluation is an increasing function of the debt covenant duration, the required rate of return, and the investment outlay dispersion over time. The proposed model of proper project finance valuation, despite inconsistency with assumptions of the fair value concept, is best suited for project finance venture appraisal, taking into consideration the inherently specific timing of the ECF. Originality/value This paper rectifies, clarifies, and extends the range of existing solutions for the project finance valuation and the application of the concepts of actual dividends and potential dividends in different valuation contexts. Furthermore, it proposes a simple and coherent method to value project finance ventures. Additionally, it offers evidence of the scale of NPV misevaluation in project finance, which occurs when the potential dividends approach is utilized.

Methods of Payment in M&A Transactions and the Operational Performance of Acquirers

The main purpose of this article is to verify if economic results of mergers and acquisitions on the Polish and Eastern European markets paid with cash outperform those financed with stocks. We applied a long-term event study methodology to identify the impact of M&A transaction on acquirer financial performance and cross-section regressions to test our main hypothesis. The conducted research shows that cash payments lead to statistically significant higher average ROA in the post-transaction period, while shares or mixed payments lead to a lower return on assets. Our findings prove that financing of M&A transaction on the Polish and East-ern European markets impact the operational performance of acquirers in line with signaling theory.

Financial restructuring and target capital structure: An iterative algorithm for shareholder value maximization

The paper presents an iterative algorithm that yields the amount of debt contracting/repayment or equity investment necessary to achieve the target capital structure. The model also helps to estimate the gains in shareholder value that result from financial restructuring process and lead to the optimal leverage ratio. It overcomes the methodological problems of existing approaches to the estimation of optimal capital structure and implicitly solves the circularity problem in the calculation of the weighted average cost of capital. The paper maintains that certain benchmarks – i.e., industry average financial leverage and unlevered beta corrected for cash – make it possible to determine the parameters of the optimal capital structure for the company, so a failure to adjust to the target may result in value destruction.

Tender Bids Evaluation in the Context of Value-Based Management

The paper aims at presenting a coherent algorithm allowing to evaluate tender bids in accordance with the principles of value-based management. The evaluation of tender results in many cases lacks rigorous methodology and often involves an inherent element of subjectivity. The mathematical models, used to assign weighs to the bid evaluation criteria, may not accurately reflect the outcomes of the valuation prepared as part of the capital budgeting process, which as a consequence, may impair the credibility and objectivity of the company’s procurement policy. The problem is further complicated by the difficulties related to operationalisation of the qualitative evaluation criteria. The paper elaborates on the idea that tender bids should be evaluated based on a unique objective function, i.e., the company value. The algorithm presented in the paper supplemented with an elaborated numerical example, gives a step-by-step guidance in the process of the tender results evaluation and presentation, thereby allowing to minimise possible errors and biases. The model may be of considerable interest to the practicing financial managers, as it accords perfectly with the process and concepts of value-based management, and assures the transparency of the tender procedures.

Inwestycje a wyniki finansowe przedsiębiorstw w okresie kryzysu

The article investigates how investments made during the pre-crisis period from 2005 to 2007 influenced the financial performance of listed firms in Poland during the crisis. Using long-term event study methodology, we established that the investments had a negative impact on operational performance as the cost effects of investment were stronger than the effects of modernising the production process. However, there were industry-specific exceptions to this rule.

Impact of Political Connections on Operational Performance: The Evidence from Poland

This study analyses the impact of political connections on the operational performance of non-financial firms in a context of a post-transition European economy. Using a new and detailed data set covering the 2001-2011 period, we found that politically connected firms are much more numerous in Poland than previously reported in the literature. We established that political connections usually lower profitability measured on the level of income from sales. However, the relationship between political connections and operational performance was affected by the characteristics of the former. Namely, the negative impact was the strongest when a firm possessed multiple connections, had politically connected members of the supervisory board and employed ex-politicians with central government experience. Therefore, our findings did not support claims based on the resource dependence theory that political connections improve the operational performance of firms.

Financial Constraints in Poland: The Role of Size and Political Connections

This article investigates the phenomenon of financial constraints in investment activities. Using a data set covering 2001-2011, we established that, despite the institutional changes and the financial system development, Polish firms remain financially constrained by the internally available funds. Additionally, we explored the impact of size and political connections on financial constraints. Unexpectedly we found that the financial constraints are not affected by either the size or the type nor the strength of political connections.