Asset valuation, Technological advances, Revaluation

It is likely that warrants will be used increasingly in the future by corporations both as means of sweetening other securities such as preferred stocks and bonds, and as securities in their own right. Many authors have analyzed the characteristics of warrants from the point of view of investors but attempts to develop a procedure for determining the cost to a corporation of issuing warrants have been lacking. We will find it convenient to measure the yield to a corporation of issuing warrants instead of common stock, rather than determining the percentage cost of warrants analogous to the cost of common stock equity, preferred stock, and interest-bearing debt.

This paper investigates how the addition of debt to the capital structure of a corporation affects the risk of the stockholders. In the first instance, we will hold the size of the firm constant and substitute debt for common stock. In the second situation, we will allow firm size to change, and will accomplish the increase in size by issuing debt. For both situations, we will first observe the effect of debt on the earnings per dollar of common stock investment. The analysis could also be made using the number of shares of common stock. Since the number of shares of common stock may be changed quite arbitrarily (as, for example, by stock dividends), we want to make the measure invariant to the number of shares outstanding. We will do this by using value of common stock and value of debt. We are then computing the variance of return on common stock investment when we compute variance of earnings per dollar of common stock investment. After considering how debt affects earnings per dollar of stockholders' investment, we will investigate the effect of debt on the total earnings of the stockholders, and on the probability of a deficit.

It is well known that different combinations of investments involve different risks. In recent years the analysis of risk has tended to focus on two moments of the probability distribution of returns, the mean and variance. This paper considers the effect on the variance of an investment fund of adding dependent investments.

There is little question that stock options have value, but there is considerable question as to how stock options should be valued. Persons studying the valuation question and writing in business periodicals have tied the value of the stock option to the expected or the actual appreciation in the value of the stock.

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 article presents a study on the regulation, implied revenue requirements, and methods of depreciation in accounting in the U.S. The choice between flow-through and normalization accounting procedures, assuming accelerated depreciation is used for taxes, is not clear. The theory of accounting, if it is assumed that straight line depreciation is correct, points to increasing the early depreciation expense with the use of accelerated depreciation for taxes compared with the amount of expense if straight-line depreciation is used for taxes. However, in practice the issue is complicated by the fact that straight-line depreciation may not be correct, thus, the adjustment may actually be causing more errors.

This article presents a study on the implications to accounting of efficient markets and the capital asset pricing model in the U.S. If a proposed accounting procedure is theoretically superior to what is done in practice and if price observations indicate that the market is using it, then this can be used to support the contention that the superior practice should be used. With less than strong-form efficient markets and with the likelihood of a significant percentage of the market being fooled by faulty accounting practices, there is still a place for intrinsic value analysis.

The article discusses tax considerations in relation to accounting for capitalized leases. The example given in the article assumed that a capitalized lease was considered appropriate. A zero tax rate was generally assumed by the accounting entries for leasing. Eliminating such assumption would lead to a more complex analysis, but the before tax and after tax computations could be reconciled. The lease problem illustrated in the article was a good example of the fact that one could not always assume that the after tax accounting analysis of a situation was a simple extension of the no tax situation.

Presents a reply by Thomas R. Dyckman to the author's article on "Discounted Cash Flows, Price-Level Adjustments and Expectations." Information on price-level adjustments that have generally been defended as translations of cost information; Discussion on objective of accounting, which was not to maintain the real assets of the firm; Comparison of $317 income to a price-level adjusted income of $87.