Knowledge that Transforms

The “burden of the debt” still appears to be a matter of concern to the United States public, economic teaching notwithstanding. In the debates preceding the 1964 tax cut, such matters as the existing budgetary deficit and the swelling public debt evoked as much passion as confusion. In this paper we intend to focus on one question: will a tax cut designed to generate a full employment equilibrium necessarily increase the debt burden, as defined by Domar. In particular, we are interested in the impact of a tax reduction on the debt burden, given that a budgetary deficit exists; and under the condition that the monetary authorities have decided to tighten credit conditions. We shall assume throughout that interest rates are determined by the monetary authorities, and that their policy is dictated by balance of payments rather than aggregate demand considerations. it will also be assumed that the tax reduction takes into account any planned increase in the rate of interest. Finally, we assume that budgetary deficits are financed by borrowing from the nonbank public and not by new money.

Wilbur W. Widicus, Jr., A Quantitative Analysis of the Small Business Investment Company Program, The Journal of Financial and Quantitative Analysis, Vol. 1, No. 1, Proceedings of the First Annual Meeting of the Western Finance Association (Mar., 1966), pp. 81-111

Investment analysis, both for purposes of capital expenditures and for financial investments, is based on an evaluation of cash flows. This evaluation involves the application of interest rates in order to determine whether a given option–a series of cash flows–is profitable or not. For numerous reasons, primarily that of simplicity, it has been traditional to assume that the rates of interest used to measure the worth of an investment are constant. With this assumption it is possible to equate the two familiar investment criteria when investments are independent and outlays are not subject to expenditure constraints, i.e., when capital markets are taken to be perfect in the usual sense. An investment is profitable if its net present value is positive when discounting of cash flows uses the (assumed constant) cost of capital, or if its (assumed unique) internal rate of return is greater than the cost of capital. Equivalence of these two criteria is historically most frequently identified with Irving Fisher [3, 4], and his two-period analysis, portrayed graphically, is generally utilized to establish the correctness of the equivalence of the criteria.

The highly quantitative bond issue size decision is generally made in a somewhat qualitative manner. The subjective opinions of brokers and intuitive rules of thumb of financial officers are rarely, if ever, compared to the optimum issue size resulting from calculations incorporating the costs of issuing bonds, and the costs of carrying extra cash. Unfortunately performance measurement in this area is very difficult, thus both good and bad decision processes tend to go unnoticed. It is possible to look at a financial decision which has been made, and, with the aid of hindsight, conclude it was a bad decision, but this proves very little. Some financial officers have done very well administering the Financial affairs of their corporations, but this does not indicate that the decision process cannot be improved. In a previous article the author of this paper investigated the question of the optimum size of bond issue.

This paper considers several related problems in the theory of optimal capital structure for corporations. It is divided into four sections, which may be briefly summarized as follows.1. Modigliani and Miller (MM) proposed that under the assumption of perfect markets and in the absence of taxes on corporate income, the total market value of the firm is unaffected by leverage. They showed that the leverage irrelevance proposition holds for “non-growth” firms when all investors agree in their estimates of the expected amount and the risk of each firm's future earnings. In section I, we show that this conclusion is not affected by growth trends or heterogeneous investor expectations. However, our analysis uncovers several additional assumptions which must be made explicitly for MM's Proposition I to hold. These additional assumptions pertain to the effects of leverage on the firm's future financing needs and future investment decisions. The generalized state-preference framework used for this demonstration is retained for subsequent discussion.

Neil C. Churchill, Audit Recommendations and Management Auditing: A Case Study and Some Remarks, Journal of Accounting Research, Vol. 4, Empirical Research in Accounting: Selected Studies 1966 (1966), pp. 128-151

Estate accounting, Financial reporting audiences, Equity reporting

It is a pleasure to participate in a small way in the effort you are putting forth-towards gaining a greater understanding of the accounting process-all of which will contribute importantly to the development of sound accounting principles. Too many discussions of accounting principles and too many decisions about accounting principles have been made in a vacuum or on the grounds of expediency. They have been made without the benefit of empirical evidence-evidence systematically researched, evidence rigorously interpreted. I know that you would agree with me that we should have no illusions concerning the speed with which measurable progress in accounting principles can be made. But it is nonetheless encouraging to see that beginnings are being made in empirical research in accounting, witnessed by the discussions that are being held here at the University. I am convinced that, in the long run, only by this kind of effort can continued progress in developing accounting principles be accomplished. Although I have had only a brief chance to review some of the papers you are discussing, I have seen enough to want sincerely to encourage you to continue these fine efforts. For the past few years I have been concerned, as some of you have surely been, over the questions and criticisms about accounting principles appearing in the press; about the doubts which such comments must arouse among people outside our profession; and about the possibly divisive influences which could develop within the profession over the issues which seem to be of concern. There is no need to go over again what is familiar ground to all of you. Let me just recall to your minds such a statement as that made by the

The research reported herein was undertaken to investigate relationships between (a) security evaluation and portfolio selection and (b) alternative inventory valuation and depreciation methods in financial reporting. First, a computer simulation model of a manufacturing firm was developed. In this simulation phase, the effects of alternative methods of financial statements and related measures (earnings per share, working capital, earnings margin, current ratio, inventory turnover, and other financial ratios along with corresponding rates of change and moving averages) were investigated under a wide range of operating conditions. In the second phase, an attempt was made to measure the effects of these accounting variations on evaluations by professional security analysts. Complete prospectuses were developed for two hypothetical companies named ETX Electronic Industries, Inc. and Rayco Electronics Corporation. Financial data for the companies were generated by the computer model. Four sets of financial reports with their related measures were generated for each company for a ten-year span. Two inventory methods (lifo and fifo) and two depreciation methods (straight-line and accelerated) were used. The four different financial reports for each company resulted m sixteen combinations of financial reports for the two companies. Participants in the study received an information packet which included an introductory letter, a return questionnaire, and one prospectus for each of the companies to be evaluated. The only variation in the in-

Auditor training, England, Wales