Accounting is a system to provide information to decision-makers about a company. To facilitate d... more Accounting is a system to provide information to decision-makers about a company. To facilitate decision-making, accounting reports should provide information that has predictive ability, . The Pathways Commission continues in the same vein and argues that accounting should provide information that facilitates good decisions. Managerial accounting tracks three types of costs: direct materials, direct labor, and factory overhead as these costs move through the manufacturing process from raw materials to work-in-process inventory to finished goods inventory and finally to cost of goods sold. T-accounts are a technique that company managers can use to keep track of costs to determine prices and profits. We demonstrate how to use T-Accounts in a simple manufacturing company to track costs and profits.
In this paper, we apply the trade-off theory of capital structure to Microsoft. We use data for b... more In this paper, we apply the trade-off theory of capital structure to Microsoft. We use data for bond ratings, bond risk premiums, and levered CAPM betas to compute the cost of equity and the weighted average cost of capital for Microsoft at different debt levels. This study shows the impact of increasing financial leverage on WACC. As financial leverage increases, the WACC decreases until the optimal debt ratio is reached, after which, the WACC begins to rise. At this debt ratio, the value of Microsoft will be maximized. Our results indicate the optimal debt ratio for Microsoft is 37.5 percent.
Journal of Business & Economics Research, Oct 26, 2012
In this paper, we provide a detailed example of applying the free cash flow to equity valuation m... more In this paper, we provide a detailed example of applying the free cash flow to equity valuation model proposed in Damodaran (2006). Damodaran (2006) argues that the value of a stock is the discounted present value of the future free cash flow to equity discounted at the cost of equity. We combine the free cash flow to equity model with the super-normal growth model to determine the current value of Coca-Cola. At the time of this paper, we determined a value of Coca-Cola at $161 billion using the free cash flow to equity model, and the actual market value of Coca-Cola was $150 billion.
The purpose of this paper is to provide a case example to teach students how to estimate a compan... more The purpose of this paper is to provide a case example to teach students how to estimate a company's sustainable growth by using an extension of the DuPont System of financial analysis on Coca-Cola Corporation. The DuPont system is based on a company's return on equity that is decomposed into three components: net profit margin, total asset turnover, and the equity multiplier. The extended DuPont system of financial analysis multiplies return on equity by the earnings retention rate to calculate sustainable growth. Sustainable growth is the highest level of growth in sales that a company can achieve using internally generated funds only.
Plagiarism is considered to be an unacceptable act, a crime, in today's University. This is reinf... more Plagiarism is considered to be an unacceptable act, a crime, in today's University. This is reinforced by the Latin and Greek origins of the word, i.e., meaning to 'plunder' or 'kidnap'. An Australian Vice-Chancellor was recently asked to resign following public allegations and findings of his plagiarism. Universities adopt and publicise policies to illustrate what they expect from their students. We posit that while some students plagiarise for reasons endogenous to those students, others do so as a result of poorly designed and constructed assignments and assessment tasks. From a simple example involving the use of the plagiarism detection software program, "Turnitin" and 50, 2nd year Accounting students' essays, we find the demonstrated level of 'originality' and 'research' as acceptable for the task the students had been set. However, we conclude that those responsible for formulating and setting assessment tasks require greater consideration of issues of cognitive development and complexity.
The objective of this paper is to demonstrate how to compute the weighed cost of capital in an em... more The objective of this paper is to demonstrate how to compute the weighed cost of capital in an emerging market using the cellular telephone industry in Russia. We compute the weighted cost of capital for three companies in the telephone industry which average 12.74%. Since the companies used in the study are in the same industry and are all large companies in the same industry, numerous confounding variables are controlled.
ABSTRACTThis paper tests the cross‐sectional robustness of the arbitrage pricing theory (APT) mod... more ABSTRACTThis paper tests the cross‐sectional robustness of the arbitrage pricing theory (APT) model using foreign exchange rate data to determine if the model is robust with respect to the various random samples and various factor analytic techniques. Factor scores are developed using various samples and factor analytic techniques to explain the returns for other samples and groupings. The APT model is found to be robust across samples and techniques.
This paper examines attitudes of Russian MBA students toward international careers and finds that... more This paper examines attitudes of Russian MBA students toward international careers and finds that family complexity impacts responses. Respondents who have complex family situations were slightly favorable toward international careers with average survey response values of about 2.50. The average response values for survey respondents who were not in complex family situations were neutral (3.00) toward an international career. The results of this survey indicate that Russian MBA students are, on average, only slightly favorable toward international careers. The average response values were not different based on gender since the average response value for males was 2.65 and the average response value for females was 2.71. These results contrast with an earlier study that found a stronger preference for international careers among Russian MBA students. Current MBA students in Moscow have more career opportunities than before. The results are based on the responses of twenty-seven Russian students in an AACSB accredited MBA program in Moscow who speak both Russian and English and work for an international company or agency.
International Business & Economics Research Journal, Sep 27, 2011
In this paper, we evaluate the weak form efficiency of the Russian Stock Market using the Russian... more In this paper, we evaluate the weak form efficiency of the Russian Stock Market using the Russian Trading System Index for the period from when the market opened, September 4, 1995 to June 1, 2007. There does appear to have been a speculative bubble in the run-up to the market peak in late 1997/early 1998 that burst when the government defaulted on debt. However, based on the empirical results of this paper, it appears that the RTSI is generally weak form efficient, particularly in the last eight periods of the study. This weak form efficiency is not surprising given the international interest in the Russian Stock Market and because the RTSI is denominated in US dollars.
In this paper, we demonstrate how to compute the required rate of return for Coca-Cola using mode... more In this paper, we demonstrate how to compute the required rate of return for Coca-Cola using modern portfolio theory with data downloaded from the internet. We demonstrate how to calculate monthly returns for the index and Coca-Cola and how to use the returns to compute the beta coefficient and the required rate of return using the downloaded data. We show how to validate the data for the market index and the company and how to compute the returns using the dividend and stock split adjusted prices. We demonstrate how to graph the characteristic line for Coca-Cola and use the graph to check that the regression was run correctly. We use Coca-Cola and the S&P 500 Index in this paper, but any company listed on Yahoo! Finance can be used as the example. This paper can be used as the basis of a lecture on intermediate corporate finance or investments to demonstrate the process using a real company.
Recent trend shows that foreign investment has increased rapidly, and raises a question as to whe... more Recent trend shows that foreign investment has increased rapidly, and raises a question as to whether managerial characteristics impact international diversification, as claimed by the Uppsala internationalisation process theory. This paper investigates the relationship between top management team’s characteristics and firm’s Outward Foreign Direct Investment, that is, international diversification. This study focuses on 83 of the top 100 largest Malaysian multinational firms. The entropy measure is used as the proxy for level of international diversification. Age, international experience, educational level and functional background are proxies reflecting the management’s cognitive abilities and competencies. The findings showed that age and functional background have significant positive influence on the level of international diversification. In addition, the results also suggested there is a reasonable support for upper echelons theory and Uppsala internationalisation process th...
The objective of this paper is to analyze the relationship between the ownership level of manager... more The objective of this paper is to analyze the relationship between the ownership level of managers and the risk averse behavior of the firm. We measure the ownership level of the managers by the ratio of their ownership of the company relative to their total wealth for a sample of 69 individuals from the Forbes 400 list of the wealthiest individuals in the world for the period from 2001-11 using an unbalanced panel data analysis. The dependent variable is the Altman Z-score of each firm and we further test these relationships using financial leverage. The independent variables are delta and Vega of the option portfolio of the manager, R&D for the firm, total assets, the age of the manager, the tenure of the manager, stock holding of the manager, CEO/Chair duality of the manager and firma age. The Z-score is statistically significantly related to size, CEO age, CEO wealth, and duality. Financial leverage is not statistically significantly related to any of the independent variables.
In this paper, we demonstrate how to collect the data and compute the actual value of Black-Schol... more In this paper, we demonstrate how to collect the data and compute the actual value of Black-Scholes Option Pricing Model call option prices for Coca-Cola and PepsiCo.The data for the current stock price and option price are taken from Yahoo Finance and the daily returns variance is computed from daily prices.The time to maturity is computed as the number of days remaining for the stock option.The risk-free rate is obtained from the U.S. Treasury website.
International Business & Economics Research Journal (IBER), 2011
In this paper, we evaluate the weak form efficiency of the Russian Stock market using the Russian... more In this paper, we evaluate the weak form efficiency of the Russian Stock market using the Russian trading System Index for the period when the market opened in 1995 to August 2003 by testing for a day-of-the-week effect using ARCH/GARCH analysis. There does appear to have been a speculative bubble in the run-up to the market peak in late 1997 to early 1998 that burst when the government defaulted on debt. However, based on the empirical results of this paper, it appears that the RTSI does have a day-of-the-week effect. However, returns are lowest on Wednesday and highest on Friday and returns are positive on every day except Wednesday. Thus, we posit a three day weekend effect from Thursday to Monday.
International Business & Economics Research Journal (IBER), 2011
This paper presents a model for the financial analysis of a bank based on the DuPont system of fi... more This paper presents a model for the financial analysis of a bank based on the DuPont system of financial analysis. The DuPont system of financial analysis is derived from an analysis of return on equity that consists of three parts: 1) operating efficiency as measured by profit margin, 2) asset use efficiency as measured by total asset turnover, and 3) financial leverage as measured by the equity multiplier. The analysis covers the period from mid 2005 to 2009. The DuPont system of analysis assesses the performance of the Arabian institution since its establishment in the Spring of 2005.
This study examines the nature of risk among Malaysian stocks from January 2008 to July 2014. The... more This study examines the nature of risk among Malaysian stocks from January 2008 to July 2014. The paper applies the concept of risk decomposition as stipulated by the single index model (SIM) in which the total risk is partitioned into two main components, i.e. systematic and unsystematic risks. Forty-five companies were randomly selected as the sample for this study. The results show that the unsystematic risk is greater than the systematic risk for all three different time periods used in the study. The level of both types of risk changed over the two sub-periods. The portion of systematic risk has decreased and the unsystematic risk component has increased considerably. This suggests the need for analysts and investors to focus on the company-specific factors when evaluating the risk associated with Malaysian stocks given the greater influence that the unsystematic risk has on total risk.
This paper extends the agency cost literature by examining whether managerial ownership, leverage... more This paper extends the agency cost literature by examining whether managerial ownership, leverage and audit quality are associated with higher performance of companies traded on the Malaysian ACE (Access, Certainty, Efficiency) Market. The sample consists of 82 companies listed on the Malaysian ACE Market for the period from 2007 to 2009. Analyses of descriptive statistics, correlation analysis, and multiple regressions are used to address the research hypotheses. The descriptive statistics analysis reveals that ACE Market companies do not perform better for the three year test period. This result may explain why the number of listed stocks on the ACE Market decreased from 2006 to 2009. Contrary to the proposed hypotheses, this study finds that audit quality has a statistically significant negative effect on firm performance. The empirical results suggest that higher audit fees received by auditors may create bonding between client and auditors.
Accounting is a system to provide information to decision-makers about a company. To facilitate d... more Accounting is a system to provide information to decision-makers about a company. To facilitate decision-making, accounting reports should provide information that has predictive ability, . The Pathways Commission continues in the same vein and argues that accounting should provide information that facilitates good decisions. Managerial accounting tracks three types of costs: direct materials, direct labor, and factory overhead as these costs move through the manufacturing process from raw materials to work-in-process inventory to finished goods inventory and finally to cost of goods sold. T-accounts are a technique that company managers can use to keep track of costs to determine prices and profits. We demonstrate how to use T-Accounts in a simple manufacturing company to track costs and profits.
In this paper, we apply the trade-off theory of capital structure to Microsoft. We use data for b... more In this paper, we apply the trade-off theory of capital structure to Microsoft. We use data for bond ratings, bond risk premiums, and levered CAPM betas to compute the cost of equity and the weighted average cost of capital for Microsoft at different debt levels. This study shows the impact of increasing financial leverage on WACC. As financial leverage increases, the WACC decreases until the optimal debt ratio is reached, after which, the WACC begins to rise. At this debt ratio, the value of Microsoft will be maximized. Our results indicate the optimal debt ratio for Microsoft is 37.5 percent.
Journal of Business & Economics Research, Oct 26, 2012
In this paper, we provide a detailed example of applying the free cash flow to equity valuation m... more In this paper, we provide a detailed example of applying the free cash flow to equity valuation model proposed in Damodaran (2006). Damodaran (2006) argues that the value of a stock is the discounted present value of the future free cash flow to equity discounted at the cost of equity. We combine the free cash flow to equity model with the super-normal growth model to determine the current value of Coca-Cola. At the time of this paper, we determined a value of Coca-Cola at $161 billion using the free cash flow to equity model, and the actual market value of Coca-Cola was $150 billion.
The purpose of this paper is to provide a case example to teach students how to estimate a compan... more The purpose of this paper is to provide a case example to teach students how to estimate a company's sustainable growth by using an extension of the DuPont System of financial analysis on Coca-Cola Corporation. The DuPont system is based on a company's return on equity that is decomposed into three components: net profit margin, total asset turnover, and the equity multiplier. The extended DuPont system of financial analysis multiplies return on equity by the earnings retention rate to calculate sustainable growth. Sustainable growth is the highest level of growth in sales that a company can achieve using internally generated funds only.
Plagiarism is considered to be an unacceptable act, a crime, in today's University. This is reinf... more Plagiarism is considered to be an unacceptable act, a crime, in today's University. This is reinforced by the Latin and Greek origins of the word, i.e., meaning to 'plunder' or 'kidnap'. An Australian Vice-Chancellor was recently asked to resign following public allegations and findings of his plagiarism. Universities adopt and publicise policies to illustrate what they expect from their students. We posit that while some students plagiarise for reasons endogenous to those students, others do so as a result of poorly designed and constructed assignments and assessment tasks. From a simple example involving the use of the plagiarism detection software program, "Turnitin" and 50, 2nd year Accounting students' essays, we find the demonstrated level of 'originality' and 'research' as acceptable for the task the students had been set. However, we conclude that those responsible for formulating and setting assessment tasks require greater consideration of issues of cognitive development and complexity.
The objective of this paper is to demonstrate how to compute the weighed cost of capital in an em... more The objective of this paper is to demonstrate how to compute the weighed cost of capital in an emerging market using the cellular telephone industry in Russia. We compute the weighted cost of capital for three companies in the telephone industry which average 12.74%. Since the companies used in the study are in the same industry and are all large companies in the same industry, numerous confounding variables are controlled.
ABSTRACTThis paper tests the cross‐sectional robustness of the arbitrage pricing theory (APT) mod... more ABSTRACTThis paper tests the cross‐sectional robustness of the arbitrage pricing theory (APT) model using foreign exchange rate data to determine if the model is robust with respect to the various random samples and various factor analytic techniques. Factor scores are developed using various samples and factor analytic techniques to explain the returns for other samples and groupings. The APT model is found to be robust across samples and techniques.
This paper examines attitudes of Russian MBA students toward international careers and finds that... more This paper examines attitudes of Russian MBA students toward international careers and finds that family complexity impacts responses. Respondents who have complex family situations were slightly favorable toward international careers with average survey response values of about 2.50. The average response values for survey respondents who were not in complex family situations were neutral (3.00) toward an international career. The results of this survey indicate that Russian MBA students are, on average, only slightly favorable toward international careers. The average response values were not different based on gender since the average response value for males was 2.65 and the average response value for females was 2.71. These results contrast with an earlier study that found a stronger preference for international careers among Russian MBA students. Current MBA students in Moscow have more career opportunities than before. The results are based on the responses of twenty-seven Russian students in an AACSB accredited MBA program in Moscow who speak both Russian and English and work for an international company or agency.
International Business & Economics Research Journal, Sep 27, 2011
In this paper, we evaluate the weak form efficiency of the Russian Stock Market using the Russian... more In this paper, we evaluate the weak form efficiency of the Russian Stock Market using the Russian Trading System Index for the period from when the market opened, September 4, 1995 to June 1, 2007. There does appear to have been a speculative bubble in the run-up to the market peak in late 1997/early 1998 that burst when the government defaulted on debt. However, based on the empirical results of this paper, it appears that the RTSI is generally weak form efficient, particularly in the last eight periods of the study. This weak form efficiency is not surprising given the international interest in the Russian Stock Market and because the RTSI is denominated in US dollars.
In this paper, we demonstrate how to compute the required rate of return for Coca-Cola using mode... more In this paper, we demonstrate how to compute the required rate of return for Coca-Cola using modern portfolio theory with data downloaded from the internet. We demonstrate how to calculate monthly returns for the index and Coca-Cola and how to use the returns to compute the beta coefficient and the required rate of return using the downloaded data. We show how to validate the data for the market index and the company and how to compute the returns using the dividend and stock split adjusted prices. We demonstrate how to graph the characteristic line for Coca-Cola and use the graph to check that the regression was run correctly. We use Coca-Cola and the S&P 500 Index in this paper, but any company listed on Yahoo! Finance can be used as the example. This paper can be used as the basis of a lecture on intermediate corporate finance or investments to demonstrate the process using a real company.
Recent trend shows that foreign investment has increased rapidly, and raises a question as to whe... more Recent trend shows that foreign investment has increased rapidly, and raises a question as to whether managerial characteristics impact international diversification, as claimed by the Uppsala internationalisation process theory. This paper investigates the relationship between top management team’s characteristics and firm’s Outward Foreign Direct Investment, that is, international diversification. This study focuses on 83 of the top 100 largest Malaysian multinational firms. The entropy measure is used as the proxy for level of international diversification. Age, international experience, educational level and functional background are proxies reflecting the management’s cognitive abilities and competencies. The findings showed that age and functional background have significant positive influence on the level of international diversification. In addition, the results also suggested there is a reasonable support for upper echelons theory and Uppsala internationalisation process th...
The objective of this paper is to analyze the relationship between the ownership level of manager... more The objective of this paper is to analyze the relationship between the ownership level of managers and the risk averse behavior of the firm. We measure the ownership level of the managers by the ratio of their ownership of the company relative to their total wealth for a sample of 69 individuals from the Forbes 400 list of the wealthiest individuals in the world for the period from 2001-11 using an unbalanced panel data analysis. The dependent variable is the Altman Z-score of each firm and we further test these relationships using financial leverage. The independent variables are delta and Vega of the option portfolio of the manager, R&D for the firm, total assets, the age of the manager, the tenure of the manager, stock holding of the manager, CEO/Chair duality of the manager and firma age. The Z-score is statistically significantly related to size, CEO age, CEO wealth, and duality. Financial leverage is not statistically significantly related to any of the independent variables.
In this paper, we demonstrate how to collect the data and compute the actual value of Black-Schol... more In this paper, we demonstrate how to collect the data and compute the actual value of Black-Scholes Option Pricing Model call option prices for Coca-Cola and PepsiCo.The data for the current stock price and option price are taken from Yahoo Finance and the daily returns variance is computed from daily prices.The time to maturity is computed as the number of days remaining for the stock option.The risk-free rate is obtained from the U.S. Treasury website.
International Business & Economics Research Journal (IBER), 2011
In this paper, we evaluate the weak form efficiency of the Russian Stock market using the Russian... more In this paper, we evaluate the weak form efficiency of the Russian Stock market using the Russian trading System Index for the period when the market opened in 1995 to August 2003 by testing for a day-of-the-week effect using ARCH/GARCH analysis. There does appear to have been a speculative bubble in the run-up to the market peak in late 1997 to early 1998 that burst when the government defaulted on debt. However, based on the empirical results of this paper, it appears that the RTSI does have a day-of-the-week effect. However, returns are lowest on Wednesday and highest on Friday and returns are positive on every day except Wednesday. Thus, we posit a three day weekend effect from Thursday to Monday.
International Business & Economics Research Journal (IBER), 2011
This paper presents a model for the financial analysis of a bank based on the DuPont system of fi... more This paper presents a model for the financial analysis of a bank based on the DuPont system of financial analysis. The DuPont system of financial analysis is derived from an analysis of return on equity that consists of three parts: 1) operating efficiency as measured by profit margin, 2) asset use efficiency as measured by total asset turnover, and 3) financial leverage as measured by the equity multiplier. The analysis covers the period from mid 2005 to 2009. The DuPont system of analysis assesses the performance of the Arabian institution since its establishment in the Spring of 2005.
This study examines the nature of risk among Malaysian stocks from January 2008 to July 2014. The... more This study examines the nature of risk among Malaysian stocks from January 2008 to July 2014. The paper applies the concept of risk decomposition as stipulated by the single index model (SIM) in which the total risk is partitioned into two main components, i.e. systematic and unsystematic risks. Forty-five companies were randomly selected as the sample for this study. The results show that the unsystematic risk is greater than the systematic risk for all three different time periods used in the study. The level of both types of risk changed over the two sub-periods. The portion of systematic risk has decreased and the unsystematic risk component has increased considerably. This suggests the need for analysts and investors to focus on the company-specific factors when evaluating the risk associated with Malaysian stocks given the greater influence that the unsystematic risk has on total risk.
This paper extends the agency cost literature by examining whether managerial ownership, leverage... more This paper extends the agency cost literature by examining whether managerial ownership, leverage and audit quality are associated with higher performance of companies traded on the Malaysian ACE (Access, Certainty, Efficiency) Market. The sample consists of 82 companies listed on the Malaysian ACE Market for the period from 2007 to 2009. Analyses of descriptive statistics, correlation analysis, and multiple regressions are used to address the research hypotheses. The descriptive statistics analysis reveals that ACE Market companies do not perform better for the three year test period. This result may explain why the number of listed stocks on the ACE Market decreased from 2006 to 2009. Contrary to the proposed hypotheses, this study finds that audit quality has a statistically significant negative effect on firm performance. The empirical results suggest that higher audit fees received by auditors may create bonding between client and auditors.
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Papers by Carl Mcgowan