…the true cost of the pension. If the firm’s contributions exceed its true pension expense, the difference can be viewed as a reduction in the overall pension obligation similar to an excess principal payments on a loan.
CFO increases by contributions – TPPC
CFF decreases by contributions – TPPC
- Given assumptions about benchmark interest rates, interest rate volatility, and call or put rule, calculate OAS using binomial model.
- Impose a small shift in the on-the-run yield curve +Δy
- Build a new binomial tree using the new yield curve
- Add OAS to each 1-year forward rate to get a “modified” tree.
- Compute BV+Δy using modified tree
- Repeat steps 2 through 5 using a parallel rate shift of -Δy to estimate value of BV-Δy
ex-ante IR is anticipated residual return adjusted for risk. It is always positive.
ex-post IR is realized past residual return adjusted for risk.
ex-post IR = tα/√n = t-stat of intercept / square root of # of observations
The investor makes a small profit if the merger is successful but may incur a large loss if it fails.
- Adjust the coefficient standard errors to account for serial correlation using Hansen’s Method which will also correct for heteroskedasticity.
- Modify the regression equation to eliminate serial correlation.
Increasing invested capital to take advantage of positive NPV projects will increase NOPAT and the dollar cost of capital $WACC. Because NPV is positive the increase in NOPAT will be larger than the increase in $WACC so EVA will increase.
A score below 1.8 implies the company is headed for bankruptcy.
A score above 3.0 implies the company is not likely to go bankrupt.
A score between 1.8 and 3.0 is inconclusive but traders may purchase a stock when its Altman Z-score approaches 3.0 and short a stock when its Altman Z-score approaches 1.8
A mathematical model that uses 8 variables to identify whether a company has manipulated earnings.
The 8 variables are:
- Day’s Sales in Receivable Index
- Gross Margin Index
- Asset Qualities Index
- Sales Growth Index
- Depreciation Index
- SG&A Index
- Leverage Index
- Total Accruals to Total Assets
M-Score > -2.22 implies manipulation.