Discussion: Risk and Financial Management Implications for Firm Growth in an Uncertain Market

The Walker, Hardin, Mapp, and Roush could provide assets to secure the son's loan in (WHMR) article has the stated purpose to a majority of iterations. "develop and present a firm growth and estate Formal testing of the effect of the father's planning model capable of addressing most of support on the son's survival was made in the complex firm growth and estate planning three situations involving alternative gift issues currently facing farm operators." strategies and land value appreciation rates: Emphasis is on father-son arrangements, (1) a $3,000 annual gift to the son with 4 perestate transfer costs, net value of property cent land value appreciation, (2) a $3,000 annutransferred, and liquidity positions under conal gift plus a gift of land in year 11 with 4 perditions of risk and uncertainty and differing cent land value appreciation, and (3) a $3,000 economic patterns affecting land values and annual gift with 7 percent land value appreciacapital requirements. The importance of these tion. The $3,000 annual gift resulted in an immatters is clearly established in the introducproved son situation without causing any fatory section of the article. ther failures in 100 model runs. The annual gift A simulation approach was selected over alplus a land gift in year 11 added further to the ternatives such as multiperiod programming. son's survival, but caused a father failure in 3 The need for an on-line package to assist indiout of 100 runs. Land value appreciation of 7 vidual farmers and the general suitability of percent, rather than the base 4 percent, yielded simulation for research on the economics of more substantial results than either of the gift growth and estate planning of farm firms are strategies. given as the major reasons for development of Do the situations presented adequately exthe particular models. The resulting two modplore the trade-off in father-son viability? Are els can be described as rich in real world conthere feasible plans for increasing survival of tent pertaining to a father-son entry, exit, the son without unduly damaging the situation transfer sequence in Great Plains wheat and of the father? The authors indicate that the cattle agriculture. Stochastic simulation of simulation models presented are capable of father and son firm growth coupled with deterconsidering alternative business organizaministic modeling of father exit and transfer to tions. The degree of son versus father failures the son provides both the extension and rein the WHMR analysis suggests a need to exsearch tools proposed by the authors. amine further the father-son arrangements. The father-son partnership and family corporation are the standard alternatives to the proFD S VIVM ROWTH prietorship business organization. These opAND SURVIVAL SIMULATOR otions sh uld be explored and compared with the results presented. Situations included in the analysis and rePerhaps there are other proprietorship arsults of the study represent a range of economrangements that should be considered. Land ic projections related to land value, prices of and non-land asset leasing, purchase of custom farm inputs and products, initial equity posiservices rather than expensive machines, and tion, and gift strategies. Base assumptions reeven custom cattle feeding are frequently sugsulted in 98 son failures in 100 runs of the modgested [1]. Indexed (based on farm income) and el, whereas the father's net worth remained eseven deferred principal and interest payments sentially unchanged in the worst results, incould increase firm survival without extreme creased 3.7 fold in the best results, and inlender risk in periods of inflating price levels. creased 2.5 times on the average in 100 runs. More conservative control over the son's line The number of farm failures by the son in relaof credit should also be evaluated. The WHMR tion to the success of the father raises concern analysis permits new loans as long as a speciabout the construction of father-son alternafied equity ratio limit (equity/long-term assets tives. The authors indicate that the father > .2) is not violated. The same equity ratio is