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Agricultural & Applied Economics Association

A Model of Cooperative Finance

Author(s): John J. VanSickle and George W. Ladd
Source: American Journal of Agricultural Economics, Vol. 65, No. 2 (May, 1983), pp. 273-281
Published by: Blackwell Publishing on behalf of the Agricultural & Applied Economics Association
Stable URL: http://www.jstor.org/stable/1240873
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A Model of CooperativeFinance
John J. VanSickleand GeorgeW. Ladd
The uniquecharacteristicsof cooperativesrequirethey be analyzeddifferentlyfromthe
moretraditionalnoncooperativefirm.A modelof cooperativefinanceis developedthat
has the objectiveof maximizingthe total, after-taxprofitsof the cooperativemember
patrons.A mathematicalanalysisderivesthe relationshipsamongthe variousfinancial
instruments,anda numericalanalysisderivesresultsfor a cooperativeundervarious
hypothesizedscenarios.We suggestthata modelincorporatingthe unique
characteristicsof cooperativesis the moreappropriatetool for studyingcooperative
financethanis the noncooperativemodel.

Key words: cooperatives,finance,firmtheory.

Cooperativesdiffer from noncooperativecor- Cooperative Objective

porations in at least five majorways:
(a) A cooperative's customers also are its The relation of long-run cooperative finance
owners. In the noncooperative firm, custom- studies (Snider and Kohler, Nervik and Gun-
ers and owners are separated. derson, Korzan and Gray, Wilson, Coffman,
(b) The price of a cooperative's common Beierleinand Shrader,Tubbs, Fenwick, Dahl)
stock is fixed by the articles of incorporation, to typical short-runcooperative studies (Bar,
and the stock is not tradedin an open market. Helmbergerand Hoos, Phillips) significantly
The price of a noncooperativefirm's common contrasts the relationbetween-studiesof non-
stock is determinedin the marketplace. cooperative financial structureand short-run
(c) One source of capital is availableto the behavior.
cooperative that is not available to the non- Research dealing with capital structureop-
cooperativefirm-deferred patronagerefunds. timization in corporations is exemplified in
(d) Cooperativesmay operate with a single Vickers' analysis. Vickers looked at two
tax on income. Noncooperative firms do not. sources of capital, debt and owners' equity.
(e) The cooperative's objective is to benefit He related equity cost to the coefficient of
its member-customers. A noncooperative variation in total net operating income, total
firm's objective is to benefit its owners. capital employed, and the leverage ratio
The differences just listed require that (debt/total liabilities). He then developed a
cooperative financial structure be analyzed debt-cost function that stated the average
differently from a noncooperative's financial interest rate of debt as a function- of the
structure. Many textbooks and at least one coefficient of variationin the earnings stream
journal are devoted to the financialstructure availableto cover the interest on debt and the
of noncooperative firms. The financial struc- leverage ratio. Vickers computedthe financial
ture of cooperatives has received much less leverage, maximizingthe rate of returnon the
attention. This paper analyzes the economics book value of owner investment, an objective
of a cooperative's financial structure. consistent with short-runprofitmaximization.
He found that the optimumfinancialleverage
occurs where the marginalrate of return on
John J. VanSickle is an assistant professor of food and resource
economics at the University of Florida; George W. Ladd is a equity is equal to the marginalrate of interest
professor of Economics at Iowa State University. on debt. In general, he concluded that the
Journal Paper No. J-10249 of the Iowa Agriculture and Home
Economics Experiment Station.
optimum allocation of the firm's demand for
This research was partially financed by the Cooperative Man- capital over alternative capital sources
agement Division of Agricultural Cooperative Service, U.S. De- equates the cost of each capital source at the
partment of Agriculture.
Ronald E. Raikes made valuable contributions to this research.
margin. This paper modifies Vickers' ap-
The authors are grateful to the anonymous reviewers for helpful proach to make it applicableto a cooperative.
comments. The assumedobjective of the cooperativeis to

Copyright 1983 American Agricultural Economics Association

274 May 1983 Amer. J. Agr. Econ.

maximize the total profits, after taxes, of the Table 1. Definitions of Symbols Used, In
memberpatrons(Ladd). This objective is sen- Order of Appearance
sible because it can be used in studies of
short-runproductionand pricingand long-run Symbol
financial structure. In this paper we follow
Tubbs, Fenwick, and Vickers and do not de- CS Total value of common stock out-
termine the amount of capital. standing
P Price share of common stock
tM Number of members in the co-
CooperativeFinanceModel operative (fixed)
7 Total number of years deferred
This paper studies financialstructureof Sec- patronage refunds are deferred
s Proportion of patronage refunds
tion 521 cooperatives that use revolving fund paid in cash
financing. This is done mainly for conve- QPR Amount of net savings allocated as
nience. A qualitativemodel for cooperatives qualified patronage refunds
that do not meet Section 521 criteria can be TKQP Total capital supplied by qualified
patronage refunds
formulated, but is much more complex. K Total capital employed by the co-
Hereafter, the word "cooperative" means operative (fixed)
"Section 521 cooperative." The cooperative D Total debt employed by the co-
must determinethe total amount of debt and operative
Members' total profits after taxes
owners' equity. Owners' equity includescapi- Tr
Members' total net revenues after
tal stock, deferred qualified patronage re- T,,, taxes from products traded in-
funds, and nonqualifiedpatronagerefunds. side and outside the cooperative
during the current year (fixed).
These net revenues represent all
Supply of Capital current income and outlays of
members before allocations of
Cooperativesorganizedas stock corporations net savings from the cooperative
commonly require a common stock purchase PVPR,m Present value of patronage refunds
for membership. Membershipallows the pa- paid to members
Net (of income taxes) dividends on
tron to be involved in the managementof the DS,,
capital stock paid to members
cooperative. The price of common stock will T Members' total net revenues be-
be assumed fixed to reflect point (b) in the fore taxes from products traded
opening paragraph.The numberof members inside and outside the coopera-
also is assumed fixed in this paper. This is tive during the current year
done mainly for convenience. It is assumed (fixed). These net revenues rep-
resent all current income and
that the cooperative limits common stock outlays of the members before
ownership to one share per member. This allocations of net savings from
satisfies an early principle of cooperation es- the cooperative
Members' average income tax rate
tablishedby the Rochdale Society (Abraham- t,M
p Ratio of member business to the
sen, p. 48). The contributionof common stock sum of member and nonmember
to the financialstructurethen may be written business
d Members' discount rate defined as
(1) CS = P - M. equal to the members' average
marginal interest cost of debt
i,. Dividend rate on capital stock
See table 1 for definitionsof all symbols used. ? Maximum allowed dividend rate
The other form of memberequity, deferred on capital stock (fixed)
patronage refunds, is derived from the DS Total (before income taxes) divi-
dends on capital stock paid to
cooperative's net savings. Net savings are al- members
located to dividends on capital stock and to NS Net savings of the cooperative
qualified and nonqualified patronage refunds. r Average interest rate on all current
Griffin et al. (p. 38) report that in 1976 only and long-term debt used by the
1.2% of the equity capital in cooperatives was cooperative
0 Net operating income of the co-
supplied by nonqualified patronage refunds. operative defined as equaling
Because of their negligible use, nonqualified total receipts less all expendi-
patronage refunds are assumed to be zero. tures except the interest cost of
The capital supplied each year' by qualified debt (fixed)
Van Sickle and Ladd A Co-op Finance Model 275

Table 1. (cont.) Cooperatives are requiredby law to allocate

refunds to members and nonmembers alike.
Symbol Definition The capital which qualifies for dividends in-
L Lagrangefunctionfor determining
cludes common stock and equity suppliedby
financial structure in coopera- deferredpatronagerefunds. Cooperativesare
tives not requiredto pay the same dividendrate on
X(i = 1, 2, 3, 4, 5) Lagrange multipliers each capital source, and most cooperatives do
E A small positive number(fixed) not pay dividends on equity supplied by pa-
MIC Marginalinterest cost of debt
ME1PV, Effect on the present value of one tronage refunds (Griffinet al., p. 85). We as-
dollar of deferredpatronagere- sume that the cooperative pays a dividend
funds of varying7 only on membershipstock. The capital stock
CL Total current liabilities employed
by the cooperative (fixed) patrons hold in membership(common) stock
LT Total long-term liabilities em- is equivalentto CS in equation (1). Dividends
ployed by the cooperative on members' capital stock are taxable to the
r, Averageinterestrate on long-term members so that the net dividends on the
debt members' capital stock may be stated
patronagerefunds depends on the proportion (7) DSm = icPM(1 - tm).
of refunds paid in cash to the patrons. The
total capital suppliedfrom qualifiedpatronage The objective function may be rewrittenby
refundsis equal to the capital suppliedby that substituting equations (5), (6), and (7) into
source each year times the number of years equation (4),
deferred, (8) T = (1 - tm)T
(2) TKQP = r(1 - s)(QPR). + p s + (+ d)- tm QPR
The total capital employed by the coopera-
tive is the sum of equations (1) and (2), and + (1 - tm)icPM.il
debt, i.e., total capital employed may be writ-
ten Constraintson Cooperatives
= -
(3) k PSI + r(1 s)QPOR + D.
The objectivefunctionis maximizedsubjectto
constraints faced by cooperatives. The first
Cooperative Objective Function constraint is that the cooperative employs K
The assumed objective for the cooperative is amount of capital, equation (3). The second
to maximize the total, after-tax profits of the and third constraints specify that the propor-
member patrons. The total, after-tax profits tion of qualifiedpatronagerefundspaid in cash
of the memberpatronsare equal to the sum of will be greater than or equal to 20%but less
the members' total net revenues, after taxes, than or equal to 100%.
for products traded inside and outside the (9) s .2,
cooperativeduringthe currentyear, the pres- -
ent value of patronage refunds paid to the (10) 1.0 - s.
members, and the net dividends on capital These constraints stem from the legal regula-
stock paid to members, is written tions governing cooperatives.
(4) = Tm + PVPRm + DSm. The fourth constraint limits the dividend
rate on capital stock. The cooperative rate
Members' total net revenues, after taxes, cannotexceed 8%per annumor the limit spec-
for products traded inside and outside the ifiedby state regulations,whicheveris greater.
cooperative association may be specified as This upperlimit varies by states and is defined
(5) Tm = (1 - tm)T. here as i,
T is a fixed parameterbecause membership (11) i > ic.
and capital employed are fixed. The fifth constraint is that the net savings
PVPRm may be defined as must be allocated. Thus, distributionof net
savings can be described as
(6) PVPRm = p s + (1-s)
1[ (1 + d)T - m QPR].
td (12) NS = DS + QPR.
276 May 1983 Amer. J. Agr. Econ.

Net savings can also be described as the net Value of s

operating income of the cooperative less the Most
interest cost of debt, cooperative associations use deferred
patronage refunds as a source of financing.
(13) NS = 0 - rD, Griffinet al. (p. 40) report that in 1976 over
84% of cooperatives used some form of de-
where 0 is a fixed parameterbecause member- ferred
patronagerefunds. Using deferred pa-
ship and capital also are fixed. tronage refunds allows a cooperative to
Substitutingequation (7) for DS and equa- proach the principle of member financingap- in
tion (13) for NS into equation (12) and rear- to use. We will assume deferred
ranging, the constraintcan be written patronage refunds are used, so that expres-
(14) - -
0 rDO icPM - QPR = 0. sions (16) and (17) must be satisfied. To de-
termines we use proof by contradiction.That
Lagrangean is, we show that the conjunctionof four rea-
sonable assumptions yields a conclusion that
With equation (8) as the objective function contradictsthe assumptions.One assumption,
and expressions (9) through (11) and (14) as therefore, must be discarded.Discardingonly
constraints, the Lagrangeanmay be stated the unnecessary assumption leads to a solu-
tion for s. Expression (16) can be satisfiedby
(15) L = (1 - tm)T
setting the Kuhn-Tuckerconditionfor r equal
+ pts + (1J- s) - tmIQPRI to zero. Expression (17) is satisfied if we re-
+ ] J state the constraint in equation (10) as
*+ (1 - tm)icPMd),+ h,[K - PMAi (18) 1.0 - E s,
- (1 - s)QPR - D] _
+ X2[s - 0.2] + X3[1.0- s]+ X4[i- ic] where Eis a fixed, small, positive number.
+ X5[0 - rD- icPM - QPR]. The Kuhn-Tuckercondition for r is
aL (1 - s)ln(1 + d) QPR
The variables that the cooperative decision (19)
makercan manipulateto achieve its objective -7 (1+ d)T
are the proportion of qualified patronage re- + X1[-(1 - s)QPR] = 0.
funds paid in cash (s), the lengthof the revolv-
ing fund (r), the dividend rate on common Equation(19) can be rearrangedand simplified
stock (i,), the amountof net savings allocated as
as qualifiedpatronagerefunds (QPR), and the A - In + d)
amount of debt to employ (D). (20) = (1
The constraint in expression (9) dictates
EconomicAnalysis that s must be greater than or equal to 0.2.
Because s must be than 0, the Kuhn-
The precedingmodel is incomplete because it Tucker conditionforgreater s is satisfiedas an equal-
lacks the requirementthat s equals 1.0 if and
only if r equals 0.0. The length of the deferral
period must be zero if all patronage refunds (21) _L=pI 1
are paid in cash. Adding constraints to the as Ll (1 + d)']1QPR j
model to incorporatethis restriction compli- + Xh(7QPR) + 2 - 3 = 0.
cates the first-orderconditions. As an alterna-
tive we carry out two analyses. In this section Assumingthatthe solution for s is not a corner
solution (0.2 < s < 1 - e), then X2and X3are
we require that
equal to zero. Substitutingequation (20) into
(16) r > 0, and equation (21) and rearranging
(17) s < 1.0. (22)

In a later section we require that s equal 1.0 QPR-p 1- (1 + d)' ( 1 d) =0.

and 7 equal 0. Under assumptions (16) and
(17) we can use qualitative analysis to deter- If QPR is greater than zero, equation (22) re-
mine optimum values of s and ic, but not of D, quires that the bracketed expression be equal
7 and QPR. to zero. Assume
Van Sickle and Ladd A Co-op Finance Model 277

(23) d > 0.
(29) ps + (1- ) -tm
Expression (23) is logical because d is the Q
LQPR = P (1+ d)T
average discount rate of the members. The
only possible value for r that satisfies both - X17(1 - s) - X5 = 0.
equation (22) and (23) is zero. To prove this, Substituting equation (20) and (28) into ex-
multiplythe expression inside the brackets of pression (29) and rearrangingyields
equation (22) by (1 + d)7 and rewrite as 1
1 = (1 + d)' - An(1 + d). (30) X5 = p (1 - E
(24) ti)-
1T- (1 d)
(1 + d)
Note that the series expansion for (1 + d)Tis
(25) (1 + d)' = 1 + iln(1 + d) (1 + d)'
The Kuhn-Tucker condition for can be
+ I [In(1 + d)]i stated as ic
j?2 . j!
aL -
(31) L (1 X4 M-
Substitutingequation (25) into (24) yields aic _ tm)PMPR-0. OP•
If the cooperative pays a dividend on mem-
(26) 1 1 + +
[n(1 d)y bers' capitalstock, (31) is an equality. Assum-
ing (31) is an equality, substituting(30) into
(31) for X5 yields
Since d > 0, equation (26) is satisfied if and (32) Xh= PM (1 - tm)- p[( - tm)
only if 1 An(I + d)
- E1 ( - (1 + d)' (1 + d)
(27) 7= 0.

But this contradictsthe assumptionin expres- Eand the expression multiplyingEin (32) are
sion (16). The conjunctionof the assumptions positive. Because p is less than or equalto one
expressed in (10), (16), and (23), and the as- then X4must be positive. Consequently,
sumption that X,2and X3 equal zero, yields a (33) i.
conclusion that contradicts expression (16). ic=
Thus not all of the conditionscan be true. The Values of D, r, and QPR
only condition that can be dropped is the as-
sumptionthat both X2and X3 equal zero. Re- The Kuhn-Tuckercondition for D can be ex-
jecting this assumptionmeans that either X,2is pressed as
negative (implying that s equals .2) or X3 is
positive (implyingthat s equals 1 - E). Royer (34) -- ,- r + D ?r0.
showed that for constant annualpatronagere- aD [ aD
funds and constant total capital supplied by
deferredpatronagerefunds, highervalues of s The bracketedexpression in (34) is the margi-
increased the present value of patronage re- nal interestcost of debt (MIC) since the inter-
funds. Therefore,we conclude that s is greater est cost of debt is rD. Substitutingequation
than 0.2 and X2equals zero. Then X3must be (20) for Xhand (30) for X. into expression (34)
positive, implying and rearrangingyields
(28) s = 1- E IInQ(1 15 C + d) -
(35) MIC - (1
(1 + d) tm)
for a maximum.
[ 1 _ rln(1 + d)-'
Value of ie - (1+ d)' (1+ d) "
The Kuhn-Tuckercondition for QPR will be Note from equation (6) that 1/(1 + d)' is the
an equality if the cooperative uses deferred present value of one dollar of patronage re-
patronagerefunds in financing. That is, funds deferred 7 years. And
278 May 1983 Amer. J. Agr. Econ.

d[1/ (1 + d) 7]/dr = - [n(1 + d)/(1 + d) '] Table 2. Predetermined Variables for the
which is the negative of the first right-hand- Cooperative
side term of equation(35). This is the effect of Variable Value
varyingr on the present value of one dollarof
deferredpatronagerefunds. Label it ME1PV,. CL $775,000
If the cooperativeuses debt equation(35) is an R $3,400,000
P $500
equality and implies that the cooperative will M 1200 members
employ sufficientdebt so that MIC is greater 0 $400,000
than the negative of ME1PV,. p 0.8
t,,, 0.35
(36) MIC (1 - t,,) - E 1i-
[(1+ 1d)
d)T With no interest on current liabilities, the
average interest rate on debt may be written
rln(1 + d) -MEIPV,.
(1 + d)7 r= rL LT
(41) r."
Finally, the Kuhn-Tuckerconditions for X,
and X, can be written as By using equations (33) and (41), equation
(38) may be rewrittenas
(37) P-Ml K - -r(1 - s)QPR
(42) 8 - r1 - LT - iPM - QPR = 0.
- D = 0, and Expressions (39) and (42) providetwo equa-
tions in the three unknowns LT, 7 and QPR.
(38) = 0- rD - icPM - QPR = 0. To obtain solutions for all three, we combined
dX5 a search method with the Gauss-Seidel al-
Because MIC is a function of D, equations gorithm.A numberof values of LT were spec-
(36), (37), and (38) are three equationsin three ified. For each value of LT, the Gauss-Seidel
instrumentalvariables:D, 7 and QPR. These algorithmwas used to solve (39) and (42) for 7
eauations can be used to solve for D, 7 and and QPR. The values of LT, r, and QPR were
QPR given values for s, d, K, P, M, p, 7, t,,,
substitutedinto (8), alongwith (28) and (33) to
and an interest rate function for r. compute 7r - T,1. This combined search-
A numerical analysis was performed to Gauss-Seidelprocedurewas used for a num-
evaluate the nature of the solutions. For the ber of values of s;' 7 was requiredto be greater
analysis, the cooperative was assumed to than or equal to 1.0 in each case.
defer payment of a small percentage of pa- Table 2 presentsthe assumedvalues for CL,
tronage refunds. The analysis considered val- K, P, M, 6, p and t,, that were used in the
ues for s from 0.2 through 0.99. Then, the solutionprocess to determinevalues for LT, r,
values of D, 7, and QPR can be determined and QPR. The values for CL, K, P, 0, and M
from equations (36), (37), and (38). were obtainedfromdata suppliedby a market-
We assumed that the cooperative employs ing and supply cooperative surveyed in July
currentand long-termliabilities as sources of 1979. The value d was assumed to be 12%,a
debt. Hence, equation(37) may be writtenas rough estimate of members'marginalinterest
cost for 1979, and i was set to 0.08.
(39) R - PAf - r(1 - s)QPR Each line of table 3 shows the combination
- (CL + LT) = 0 of values of LT, r, and QPR that maximizedIr
Because currentliabilities (excludingthe cur- less T,, for the specified value of s. The com-
rent portion of long-term debt) often can be puted values of the objective function support
used for financing with relatively low or no the earlier conclusion that higher values of s
interest, we assumed that the average interest yield highermembers'total net revenue, equa-
tion (28). Values for s below 0.52 used the
rate on current liabilities is zero. The average minimum amount possible for deferred
interest rate on long-term debt is assumed to be
an increasing function of the permanent lever- An alternative is the following: fix CL so that dD = dLT and
age ratio [LT/(K - CL)], and is arbitrarily ar/8D = ar/aLT. Then substitute (40) into (41) and solve for MIC.
Substitute this result, the definition of MEIPV,, and (1 - s) into
specified as (38) to obtain a third.equation to be solved with (41) and (44) by
the Gauss-Seidel algorithm. In using Gauss-Seidel for solving
(40) rL = 0.07 + O.OI[LT/(K - CL)] first-order conditions, one needs to check that the solution is a
+ 0.03[LT/(K - CL)]'. maximum rather than a minimum.
Van Sickle and Ladd A Co-op Finance Model 279

Table 3. Solutions for QPR, LT, and r for sidered for long-term debt. The optimumre-
VariousValues of s sults from all combinationsfor these restric-
tions are listed in table 4. In every case the
s QPR LT 7T - T,, results show that the cooperativeshould defer
(Years) -------- ($1,000)-------- patronage refunds the maximum allowable
.2 1.0 176.8 1,883.5 111.0 time. The results also indicate that solutions
.3 1.0 175.1 1,902.5 111.7 for long-term debt depend on the maximum
.4 1.0 173.3 1,921.0 112.4
.5 1.0 171.7
allowed value of 7. As 7 is allowed to increase,
1,939.2 113.1
.51 1.0 171.5 1,942.0 113.2 the optimum value of long-term debt gener-
.52 11.98 352.0 0 113.8 ally decreases. Also, for some prespecified
.6 14.38 352.0 0 123.7 maximumfor values of 7, the optimumlevel of
.7 19.17 352.0 0 139.4
.8 28.76 352.0 0 160.1
long-termdebt is less than the allowed level.
.9 57.52 352.0 0 186.5
For instance, when r is restricted to twelve
.99 575.28 352.0 0 211.4 years, the cooperative should employ
1.00 0.0 352.0 2,025.0 113.4 $1,146,645 of long-term debt. Restricting
long-termdebt to an amount that is less than
the optimum amount leads to long-termdebt
used at the maximumallowed amount
patronagerefunds.Values for s greaterthanor being
and s decreasing to allow substitution of
equal to 0.52 used all deferred patronagere-
funds and no long-termdebt. equity capitalfor debt capital. The results also
show that in six of the eight feasible solutions s
However, in the previous model some con- was
straints that may be needed for practicality approximatelyequal to 0.7. In the cases
were omitted. The numericalanalysis shows where s was less than 0.7, no feasible solution
existed for values of s greaterthan those in the
the maximum solution to be where s equals
0.99 and 7 equals 575 years. A revolving fund
of 575 years is not reallyfeasible. The numeri-
cal analysis shows that for values of s below Analysis Two
0.51 the maximumsolutionexists where heavy The previous analysis assumed (16) and (17).
debt financing is used, i.e., the permanent We now assume s equals 1 and r equals 0.
leverage ratio ranges from 0.71 to 0.74. While Under this assumptionthere is only one solu-
it is possible for cooperatives to have perma- tion. Long-termdebt is derived from (39) as
nent leverage ratios this high, it is quite likely
the lenders would impose severe operating (43) LT = k- PMf.
constraints on such cooperatives. If p is less than one, the solution for i, is (33).
Further restrictions were added to the And QPR is obtained from (42) as
model to evaluate the effect of limitationson
revolving fund length and debt. Adding these (44) QPR = 0 - rLLT- iPM.
restrictions required adding two additional
constraintsand Lagrangianmultipliersfor the
maximumallowed values of 7 and D. The re- Table 4. OptimumSolutionswith Restricted
sults of the mathematical analysis can be Levels of 7 and LT
shown to indicate that with these restrictions Optimum Solution for
the cooperative must either pay the maximum Maximum Allowed
allowable cash patronage refund rate, i.e., s LT/
equals 1 E, or the cooperative must defer r LT s LT (K - CL) 7r- T,,
patronage refunds as as
long possible, i.e., r (Years) ($1,000) ($1,000) ($1,000)
equals the maximum allowed value, or both 4 1,025 a a a a
conditions must hold. 4 1,525 .43 1,520. .58 109.5
The search-Gauss-Seidel algorithm was 4 1,875 .72 1,816. .69 113.0
modified to incorporate these additional re- 8 1,025 .54 1,025. .39 112.8
strictions. Limits of four, eight, and twelve 88 1,525
years were considered for revolving fund 12 1,025 .69 1,011. .38 122.7
length and limits of $1,025,000 (a permanent 12 1,525 .72 1,147. .43 123.6
leverage ratio of 0.39), $1,525,000 (a perma- 12 1,875 .72 1,147. .43 123.6
nent leverage ratio of 0.58), and $1,875,000 (a a No feasiblesolutionexists when 7 is
constrainedto be less than
permanentleverage ratio of 0.71) were con- four years and LT is constrainedto be less than $1,025,000.
280 May 1983 Amer. J. Agr. Econ.

The last line of table 3 presents the results for of cooperativefinance. A study of cooperative
this solution. This value of -r - T,,, almost finance must incorporatethe unique features
equals the value when s equals .52 and 7 of cooperatives listed at the beginningof this
equals 11.98. Values of 7 - T,,,in table 4 are paper. Our study is an effort to incorporate
generally larger(up to $9,100 larger)than the these unique features into a practical model
last value in table 3. for analyzingcooperative finance. The model
could become more useful by developing ap-
propriateinterest rate functions and discount
Conclusions and Implications rates for the membercustomers and consider-
ing the dynamic aspects of variable earnings
We have studied a cooperative whose objec- and interest rates, and growth.
tive is to maximize the after-taxprofits of its
memberpatrons. Ourresults show that for the [Received May 1981; revision accepted
conditions studied here a cooperative can do September 1982.]
better for its memberpatrons if it pays about
70%of its patronagerefundsin cash than if it References
pays all in cash or only 20% in cash. Our
results also show that if a cooperative pays a
dividend on common stock, it should pay the Abrahamsen, Martin A. Cooperative Business Enterprise.
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aged approximately 0.33. Our analysis 57.
yielded optimumvalues for the leverage ratio Beierlein, James G., and Lee F. Schrader. "Patron Valua-
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0.71 1980. The 41.
results in table 4 show that shorteningthe de- Coffman, Dick L. "Alternative Long-Run Financial Im-
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cooperativeusing moredebt and payingless of Growth and Capital Rationing." M.S. thesis, Iowa
the patronage refunds in cash. These results State University, 1976.
coupled with the recent pressure to shorten Dahl, Wilmer A. "An Analysis of Financial Management
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