We were working on a portfolio scenario with some very good results from our yield engine. We introduced management expenses that went well beyond the end of  the majority of transactions and found the SSFM (Standard Sinking fund Method) handled the flows nicely by setting up a needed sinking fund. We hope to benign a direct contact campaign shortly. looking forward to talking to some of you.

Extended Yield Methods: Part 2 Sources of Funds

Page 2 of the Discussion Page at PAMSDCF.com

06/19/2015

The answer to the question "who cares" is " everyone should care".  Firstly, if a flow fails Descartes' rule of signs test it will be because contained in the flows are negative outflows after the first initial investment outflow. That is what causes the sign changes of the rolling forward totals. The first question that should come to mind is "Where will these negative subsequent flows come from? " The second question is what cost, if any, should be introduced to the analysis and how will it be introduced.

Let's try to answer the first question and watch what happens. Where is the money going to come from? There are two main sources of the money, one would be from within the transaction, and the other would be from outside the initial transaction, such as a loan or additional investment.  Let's look at the source from within the transaction flows first. In many instances the cash flows we are examining will have sufficient prior inflows to adequately meet the subsequent required outflows. In those cases we could set aside some of the inflowing money in sufficient amounts to meet the subsequent required outflows. The transaction will be fully self-supporting and all outflows, after the initial investment, will be expensed to the transaction by being part of the net flows. The set-aside money needed to pay out the negative periods is conceptually provided for by putting the money in an account called a sinking fund. A physical fund may not be set up. The savings may be viewed as being held by the parent company. In that case it is valued at the parent's marginal cost of borrowing (or some other agreed rate). The earnings on the fund, real or conceptual, would be the interest rate paid by the institution holding the money. If it is in a bank, then it is at some bank savings rate, if used by the parent, then it should be the parent's marginal cost of funds. The fund money can be viewed as an offset to existing debt until returned to the transaction by the parent company. The governing limits of the sinking fund are usually to put aside just enough money to meet the negative flows. Taking more money than minimally needed and placing it in a savings account will usually be detrimental to the profitability of the transaction since the transaction is presumed to be earning more than can be earned at the sinking fund institution, all other things being equal. If this is done precisely, it will have the effect of smoothing out the cash flow's swings from positive to negative and eliminate the multiple sign change issue introducing zero cash flows in some of the periods that were formerly negative. More importantly, the transaction model is now pictured and set up as a logical flow of cash that defines all of the sources of the flows, income and expenses associated with the model. Since all of the funds are from within the transaction after the initial investment, the profitability (or lack thereof), as measured by the rate of return within the flows, is all-inclusive recognizing all costs and income associated with transaction. By addressing the issue of "where does the money come from" we have solved three issues: where is it from, what is the cost, and is the rate so determined reliable and unique.  For the case where the money comes from within we have solved it all. Voila! In case anyone hasn't noticed, we also explained what an "Extended Yield Analysis Method " is and why it is needed. Simply put, it is needed to present a logical, all inclusive, verifiable and complete flow model and develop a unique and implicit rate from an otherwise incomplete, illogical arbitrary multiple rate potential flow scenario.

(to be continued)

Extended Yield Methods: Introduction

                What are  Extended Yield Analysis Methods ?Introduction Part 1:

06/13/2015

One of PAMS-DCF's goals was to introduce a new way of learning about Discounted Cash Flow Analysis that provided a hands on approach using sophisticated yield analysis software that here- to- fore was  available only to the big guys on the block. This forum will discuss definitions and issues of various topics, many of which are covered by the glossary contained in our book. I'd like to start by discussing the mathematical principals that  are required in the use of DCF. We intend to keep the discussion in strictly laymen's  terms.  Our first goal is to explain the geniuses of "Extended Yield Methods" and why they are needed.

DCF (discounted cash flow ) analysis uses various formulas in computing Present Values  and Future Values , payment amounts and terms depending on the given information.  Some of theses formulas in mathematics' jargon are generally referred to as Polynomials.  They are equations that have certain attributes common to all in their class and they behave in a fixed and determinable way across their entire spectrum. There are certain rules that should always be tested for when dealing with this class of equations known as or called Polynomials.  We don't really care what the attributes are or what most of the rules are for theses equations, but  (and there is always a "but") there is one rule that does effect  DCF analysis that we must learn to deal with in order to avoid making some very serious miscalculations. We don't have to learn the proof of this rule, or why it is always true. The appendix of our book covers a proof and extended discussion, but you had better be a mathematician of sorts to follow it. We simply have to learn how to test for cash flows that have the potential of breaking this rule and do something to reestablish the rule's principal in the flows we are examining.
Some of you are already familiar with the name Descartes. He was a great mathematician of the 18th century. He demonstrated that when dealing with equations in the class of "polynomials" in general, (here as they are applied to cash flows),  certain conditions arise that allow us to have multiple positive rates that will discount to zero (NPV=0). Obviously, Descartes was not doing DCF problems when he formulated this principle. It applies to all polynomials including those representing cash flows. The rule he discovered was that if there is more than one sign change in the polynomial's terms (which in DCF are determined by the flows which starts out negative, otherwise there is no investment), then there is a potential for, but not necessarily always, more than one positive solution that will resolve the polynomial equation to zero.  Putting this statement differently, if there is only one sign change in the rolling total, then there is only one rate that will resolve to a zero NPV.  This rate is unique or it can be said to be "inherent" in the cash flows.

So who cares? If we have five different sign changes in the rolling total of the flows and potentially five different positive rates that will resolve to a zero present value, then let's just pick one that we like and use it to distribute the income over the term of the deal on that rate basis (interest basis). After all the total earnings remains the same (total interest income) at the end of the day, only the timing of income changes as the rate changes.

It is noted that in the leasing arena much is changing, however, whatever the outcome, the financial analysis of the transaction's economics will always require a comprehensive understanding of Discounted Cash Flow Analysis. That being said, when reference is made to FASB 13, it should be understood that it may be a legacy document in many respects going forward, particularly in the lessor leveraged lease area. As PAMS-DCF uses an extended yield method called MISFM which should never have been adopted in the first place, and will have no good reason to remain other than to do review type work with,  it will be referred to as "MISFM Legacy". 

(to be continued)

(Completed through page 2)