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Autor     Thomas E. Copeland / Thomas E. Weston
Titel    Financial Theory and Corporate Policy
Ort    Reading
Verlag    Addison Wesley
Ausgabe    3rd edition, reprinted with corrections, May 1992
Jahr    1992

Literaturverz.   

yes
Fußnoten    yes
Fragmente    5


Fragmente der Quelle:
[1.] Svr/Fragment 069 11 - Diskussion
Zuletzt bearbeitet: 2020-05-25 19:56:31 [[Benutzer:|]]
BauernOpfer, Copeland Weston 1992, Fragment, Gesichtet, SMWFragment, Schutzlevel sysop, Svr

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Seite: 69, Zeilen: 11-23, 101-104
Quelle: Copeland Weston 1992
Seite(n): 25, 26, Zeilen: 25: 32 ff.; 26: 10 ff.
Investment decision rules are usually referred to as capital budgeting techniques. According to Copeland and Weston (1992: 26) the best technique will possess the following essential property: It will maximize shareholder's wealth. This essential property can be broken down into separate criteria:

- All cash flows must be considered.

- The cash flows should be discounted at the opportunity cost of funds.

- The techniques should select from a set of mutually exclusive projects the one that maximizes shareholders wealth.

- Managers should be able to consider one project independently from all other (this is known as the value additivity principle).

These theories assume that capital markets are frictionless1 and that the stream of cash flows estimated without error, which is also referred to as “Investment under Certainty” (Copeland and Weston 1992: 25).


1 In a frictionless market (1) financial managers can separate investment decision [sic] from individual shareholder preferences, and (2) monitoring costs are zero, so that managers will maximize shareholder's wealth. All they need to know are cash flows and the required market rate of return for projects if [sic] equivalent risk (Copeland and Weston, 1992: 25).


Copeland, T.E. & Weston, J.F. 1988 [sic], Financial Theory and Corporate Policy, 3rd ed., Addison-Wesley, Reading, Massachusetts.

We assume, for the time being, that the stream of cash flows provided by a project can be estimated without error, and that the opportunity cost of funds provided to the firm (this is usually referred to as the cost of capital) is also known. We also assume that capital markets are frictionless, so that financial managers can separate investment decisions from individual shareholder preferences, and that monitoring costs are zero, so that managers will maximize shareholders' wealth. All that they need to know are cash flows and the required market rate of return for projects of equivalent risk.

[page 26]

Investment decision rules are usually referred to as capital budgeting techniques. The best technique will possess the following essential property: It will maximize shareholders' wealth. This essential property can be broken down into separate criteria:

• All cash flows should be considered.

• The cash flows should be discounted at the opportunity cost of funds.

• The technique should select from a set of mutually exclusive projects the one that maximizes shareholders' wealth.

• Managers should be able to consider one project independently from all others (this is known as the value-additivity principle).

Anmerkungen

The source is given in the text and in a footnote. Quotation marks are used for three words ("investment under certainty") which cannot be found in the source for the page referenced, but only on p. 78 in the caption for Figure 4.1.

Sichter
(SleepyHollow02) Schumann


[2.] Svr/Fragment 070 02 - Diskussion
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BauernOpfer, Copeland Weston 1992, Fragment, Gesichtet, SMWFragment, Schutzlevel sysop, Svr

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Untersuchte Arbeit:
Seite: 70, Zeilen: 2-8, 10-15, 17-29
Quelle: Copeland Weston 1992
Seite(n): 27, 28, 29, 36, Zeilen: 27: 12 f., 19 ff.; 28: 2 ff.; 29: last paragraph; 30: 17 f.; 36: 5 ff.
[5.2.1 Static Methods]

Accounting Rate of Return: The ARR is the average after tax profit divided by the initial cash outlay. It is very similar to the Return on Assets, or the return on investment. Copeland and Weston (1999: 28) do not regard the ARR as an appropriate capital budgeting technique as it uses accounting profits instead of cash flows and it does not consider the time value of money.

Pay-Off-Method (Pay Back Method): The payback period is the number of years it takes to recover the initial outlay. [...] If management were adhering strictly to the project, it would choose the project with the shortest payback period. The difficulty of the payback method is that it does not consider all cash flows and it fails to discount them. Copeland and Weston (1992: 26-28) reject the Payback Method because it violates three of four properties that are desirable in capital budgeting techniques as stated above (1,2 and 3).

[5.2.2 Dynamic]

Internal Rate of Return (IRR): The IRR on a project is defined as that rate, which equates the present value of the cash outflows and inflows, i.e. where the NPV is zero. Hence this is the rate of return on invested capital that the project is returning to the firm. If the IRR criterion is used and the projects are independent, any project that has an IRR greater than the opportunity cost of capital will be accepted. According to Copeland and Weston (1992: 36) the IRR rule errs in several ways. First, it does not obey the value additivity principle, and consequently managers who use the IRR cannot consider projects independently of each other. Second, the IRR rule assumes that funds invested in projects have opportunity costs equal to the IRR of the projects. This implicit reinvestment rate assumption violates the requirement that cash flows be discount at the market determined opportunity cost of capital. Finally, the IRR rule can lead to multiple rates of return whenever the sign of cash flow changes more than once.


Copeland, T.E. & Weston, J.F. 1988 [sic], Financial Theory and Corporate Policy, 3rd ed., Addison-Wesley, Reading, Massachusetts.

1. The Payback Method

The payback period for a project is simply the number of years it takes to recover the initial cash outlay on a project.

[...]

If management were adhering strictly to the payback method, it would choose project A, which has the shortest payback period. [...] The difficulty with the payback method is that it does not consider all cash flows and it fails to discount them.

[page 28]

We reject the payback method because it violates (at least) the first two of the four properties that are desirable in capital budgeting techniques.8

2. The Accounting Rate of Return

The accounting rate of return (ARR) is the average after-tax profit divided by the initial cash outlay. It is very similar to (and in some uses exactly the same as) the return on assets (ROA) or the return on investment (ROI), and they suffer from the same deficiencies.

[...]

The problem with the ARR is that it uses accounting profits instead of cash flows and it does not consider the time value of money.

[page 29]

4. Internal Rate of Return

The internal rate of return (IRR) on a project is defined as that rate which equates the present value of the cash outflows and inflows. In other words, it is the rate that makes the computed NPV exactly zero. Hence this is the rate of return on invested capital that the project is returning to the firm.

[page 30]

If we use the IRR criterion and the projects are independent, we accept any project that has an IRR greater than the opportunity cost of capital, which is 10%.

[page 36]

The IRR rule errs in several ways. First, it does not obey the value-additivity principle, and consequently managers who use the IRR cannot consider projects, independently of each other. Second, the IRR rule assumes that funds invested in projects have opportunity costs equal to the IRR for the project. This implicit reinvestment rate assumption violates the requirement that cash (lows be discounted at the market-determined opportunity cost of capital. Finally, the IRR rule can lead to multiple rates of return whenever the sign of cash flows changes more than once.

Anmerkungen

The source is given three times, but no quotation marks are used.

Sichter
(SleepyHollow02) Schumann


[3.] Svr/Fragment 071 01 - Diskussion
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Seite: 71, Zeilen: 1-5
Quelle: Copeland Weston 1992
Seite(n): 28, 29, Zeilen: 28: last paragraph; 29: 14 ff.
[The NPV is computed by] discounting the cash flows at the firms opportunity cost of capital. The NPV method aims to find projects with a positive NPV (greater than zero). Copeland and Weston (1992: 28) state that the NPV of a project is exactly the same as the increase in shareholder's wealth. According to them, the NPV technique is the correct decision rule for capital budgeting purposes.

Copeland, T.E. & Weston, J.F. 1988, Financial Theory and Corporate Policy, 3rd ed., Addison-Wesley, Reading, Massachusetts.

The net present value (NPV) criterion will accept projects that have an NPV greater than zero. The NPV is computed by discounting the cash flows at the firm’s opportunity cost of capital.

[page 29]

The NPV of a project is exactly the same as the increase in shareholders' wealth. This fact makes it the correct decision rule for capital budgeting purposes.

Anmerkungen

The source is given, but no quotation marks are used.

Sichter
(SleepyHollow02) Schumann


[4.] Svr/Fragment 074 03 - Diskussion
Zuletzt bearbeitet: 2020-02-24 12:42:39 [[Benutzer:|]]
BauernOpfer, Copeland Weston 1992, Fragment, Gesichtet, SMWFragment, Schutzlevel sysop, Svr

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Seite: 74, Zeilen: 3-6
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Seite(n): 41, Zeilen: 18 ff.
This chapter showed that in the case of investment under certainty other decision criteria than the NPV method, such as the payback method the ARR, and the IRR, do not necessarily guarantee undertaking projects that maximize shareholder's wealth (Copeland and Weston 1992: 41).

Copeland, T.E. & Weston, J.F. 1988 [sic], Financial Theory and Corporate Policy, 3rd ed., Addison-Wesley, Reading, Massachusetts.

Other decision criteria, such as the payback method, the accounting rate of return, and the IRR, do not necessarily guarantee undertaking projects that maximize shareholders' wealth.
Anmerkungen

The source is given, but it is not made clear that a sequence of 20 words is copied verbatim; no quotation marks.

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(Schumann), SleepyHollow02


[5.] Svr/Fragment 075 08 - Diskussion
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Untersuchte Arbeit:
Seite: 75, Zeilen: 8-12, 101-102
Quelle: Copeland Weston 1992
Seite(n): 241, 251, Zeilen: 241: 27 ff.; 251: 17 ff.
[5.5.2 The Formula]

The formula for pricing European call options1, c, on financial assets developed by Black and Scholes (1973) has been described as a function of five parameters: The price of the underlying asset, S; the instantaneous variance of the assets returns, σ2 ; the exercise price, X; the time to expiration, t; and the risk-free rate, rf.

c = f (S, X, rf, t, σ2)



1 European options can only be exercised upon their maturity, as opposed to American options, which can be exercised at any date up to maturity.


Black, F. & Scholes, M. 1973, “The Pricing of Options and Corporate Liabilities”, Journal of Political Economy, vol.81, pp. 637-654 (May – June 1973).

[page 251]

F. SOME DOMINANCE THEOREMS THAT BOUND THE VALUE OF A CALL OPTION

The value of a call option has been described as a function of five parameters: the price of the underlying asset, S; the instantaneous variance of the asset returns, σ2; the exercise price, X; the time to expiration; T; and the risk-free rate, rf:

c = f(S, σ2, X, T, rf). (8.1)

[page 241]

B. A DESCRIPTION OF THE FACTORS THAT AFFECT PRICES OF EUROPEAN OPTIONS

To keep the theory simple for the time being, we assume that all options can be exercised only on their maturity date and that there are no cash payments (such as dividends) made by the underlying asset. Options of this type are called European options. They are considerably easier to price than their American option counterparts, which can be exercised at any date up to maturity.

Anmerkungen

The actual source is not given.

The comparison shows that passages like the listed ones below cannot be found in Black and Scholes (1973):

  • "has been described as a function of five parameters: The price of the underlying asset"
  • "the instantaneous variance of"
  • "the risk-free rate"
  • "which can be exercised at any date up to maturity".

The text following this fragment is taken from another source, but again not from Black and Scholes (1973), despite the given reference, see Fragment 075 13.

Sichter
(Klgn) Schumann