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Using the WACC methodology to improve the assessment of projects in the french farming industry. Empirical evidences from farm's results of Isère

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par Anaël BIBARD
Grenoble Graduate School of Business - MBA 2012
  

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7 Limitations and Further Research Implications

7.1 Survey Construction

The purpose of this survey is not to have an exhaustive view of the tools used by the practitioners in the field. As the questionnaire was sent to consultants of different CERFRANCE, the answers cannot be considered as representative for all accounting companies working with farmers. However, the CERFRANCE has a dominant position in this particular market all over the country and serve more than 50% of the farmers. Therefore, it could be appropriate for the CNCER to intensify its researches on the subject to uniform the practices across all CERFRANCE.

7.2 ROE and ROA Analysis

As we can see in Table 7 page 29, some years like 2009 count fewer companies available for analysis, even if the number of books accounts produced by the CERFRANCE Isère increased constantly over the 5 years. Therefore, some companies were not included in the research because of limitations of the information system. However, this limitation cannot be considered as enough relevant to invalidate the results obtained, mainly because the non-inclusion in the database for a company occurs randomly (there is no reason not to include results in the database).

Another limitation comes from the decision to work on a constant population. This constant population enables an interpretation of the results over several years, but it also removes the companies that went bankrupt during the studied period. Therefore, this exclusion criterion may have an effect on the results for the hypothesis 2 which analyses the effect of financial distress. However, the number of bankruptcy in agriculture is really low: only 63 farms went bankrupt in 2011 in Rhone Alpes (Coface, 2011) over 39 020 farms (Agreste, 2011), which represents 1.6%o bankruptcy in the sector for the year.

Another limitation comes from the number of farms available for the cattle specialization. These farms, specialized in beef production are not enough represented in Isère to obtain reliable results. Other regions such as Côtes d'Or or Saône-et-Loire should work on the subject.

Finally repeated measure statistical test could have been performed to test the data to try to evaluate more precisely the ideal debt leverage ratio. However, these mixed models are not available with traditional statistical software as they do no compare means or medians but probabilities (here probability to fall in financial distress in year N+1 depending on the debt level of year N). As this research paper tries to serve as a base for all the consultants of the CERFRANCE network, this analysis needs to be replicable with the results of other departments without expensive tools such as SAS or SPSS. However, this limitation justifies further researches on the topic.

7.3 Bond Yield Plus risk Premium Model

The bond yield plus risk premium model is easier to calculate than the WACC for the farms, which represents a strong advantage for this method. However, this model does not take into account the financial structure of the companies studied. This strong limitation reduces its applicability to the farms of Isère, which are really diversified.

The research was based on elements found in the literature for this part of the research. It has been
decided to choose this method in order to try to estimate what actualization rate could be chosen

without exhaustive researches on the subject. The purpose of this choice is to compare the actualization rate used by practitioners with the rates the tax authorities could use in case of litigation.

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