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Report of the Program Chairman

James C. Van Horne
Journal of Financial and Quantitative Analysis 1981 16(4), 631-633
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Implied Fixed Costs of Long-Term Debt Issues

James Horne
Journal of Financial and Quantitative Analysis 1973 8(5), 821
In this paper, a model is developed for deriving the implied fixed cost of a bond flotation. Using a sample of electric utility companies over the 1961–1970 period, implied fixed costs are computed for 318 bond issues. These fixed costs then are evaluated in an effort to cast light on whether companies behave optimally with respect to the size and frequency of bond issues. Regression results are consistent with the adjustment of debt issuing behavior in keeping with: (1) expectations about the future course of interest rates; (2) variable costs increasing at a decreasing rate with the size of individual issue; and (3) differences in the cost of carrying excess liquidity which arise from differences in quality rating. An estimate of the average fixed cost of issuing bonds is evaluated as is the debt issuing behavior of individual companies. Over all, the model and its testing give considerable insight into the implied fixed costs of issuing debt.

A Note on Biases in Capital Budgeting Introduced by Inflation

James Horne
Journal of Financial and Quantitative Analysis 1971 6(1), 653
In the allocation of capital to investment projects, it is unlikely that optimal decisions will be reached unless anticipated inflation is embodied in the cash-flow estimates. Often, there is a tendency to assume that price levels remain unchanged throughout the life of the project. Frequently this assumption is imposed unknowingly; future cash flows are estimated simply on the basis of existing prices. However, a bias arises in that the cost-of-capital rate used as the acceptance criterion embodies an element attributable to anticipated inflation, while the cash-flow estimates do not. Although this bias may not be serious when there is modest inflation, it may become quite important in periods of high anticipated inflation. The purpose of this note is to investigate the nature of the bias and how it arises.