Sami Byanju Diran Bodenhorn, "Goals of Business Finance: The Coincident Profit Hypothesis", The journal of Finance, vol.

XIX, no. 1 I. Introduction and summary Since the traditional concept of profit was difficult to apply to investment decisions and wealth maximization, the concept of cash flow was developed associated, with the cash flow theory of stock value. The major properties of this concept of profit that differentiates it from its traditional concept are:a. It can be used in decision making within the firm since profit maximization is in stockholders' interest. b. The profit of the firm coincides with the stockholders' income in each period. c. Past profit can be measured from market values. II. Cash Flows and Stock Valuation This section presents the definition of cash flows and a theory of stock pricing based on cash flow analysis. In defining cash flows, distinction between transactions involving goods or services, financial obligations and cash balances are taken into consideration. The net cash flow in any period is the difference between cash received by the firm from purchasers, debtors or banks and the cash used by the firm to increase cash balances to pay for goods or services, to pay interest or debt or to lend. Positive cash flow represents cash payment to stockholders and negative results into cash payment by stockholders i.e new stock subscription. Cash flow theory says that the value of the stock is the present value of the future net cash flows. The investment decision on stock price is favorable if the present value of the net cash flow is positive. Similarly, the theory also implies that a decision to undertake investment projects in future influences the value of stock today. The stock value is entirely based upon future cash flows. III. The Cash Flow concept of profit In this section cash flow profit is defined as the increase in the stock value plus the net cash flow of the period. Here the profit is defined in connection with particular period and reflects some of the activities of the firm during the period. This concept of profit is significantly different from the conventional concept which can be termed as 'earning' rather than profit. Earning of a period is concerned with difference between the sales revenue and cost. Earnings are not influenced by changed expectations about the future whereas profits are. This section further distinguishes the term pure profit and business profit or income. Pure profit is defined as the difference between actual end of period wealth and expected end of period wealth. Business profit on the other hand is defined as difference between end of period wealth and initial investment.

IV. The depreciation problem This section is concerned with the handling of depreciation. It is shown that depreciation expenses understate capital costs unless implicit interest is charged on the book value of net worth. The inclusion of implicit interest expense on net worth makes the present value of the costs charged to equity capital in each year minus the debt repayment plus implicit interest equal to the initial investment. V. The maximization problem In this section it follows that the correct calculation of capital costs is necessary for decision making. Maximization of earning is not in stockholders interest while the maximization of pure earning is. It further states the present value of the pure earning of a project does not depend on the depreciation pattern, even though it is charged as an expense in various periods. The traditional profit concept cannot be used in decision making unless the implicit interest is charged as an expense and the decision is independent of the pattern of depreciation, which confirms the cash flow analysis. VI. The timing problem This section shows that cash flow profit and stockholders' income coincide in every time period, since it is based on the return which the stockholder would get if the firm liquidated as a going concern. Traditional profit is based on the return which the stockholders would get if the firm liquidated its assets. VII. The measurement problem The last section points out briefly the advantages of having a profit concept which can be measured from market values. As earning maximization is not the in the stockholder's interest, it is not a satisfactory measure of performance. Thus the business profit is the only satisfactory measure of performance.