In the standard construction of the free cash flow (FCF) in the M amp; M world without taxes, it is assumed that ALL of the generated cash flow is distributed to the debt holder and the equity holder, and there are no surplus funds that are invested in short-term marketable securities. Under...

It is a well known problem the interactions between the market value of cash flows and the discount rate (usually the weighted average cost of capital, WACC) to calculate that value. This is mentioned in almost all textbooks in corporate finance. However, the solution adopted by most authors is...

In a forthcoming paper, Fernandez (2002) claims to derive a formula for the valuation of debt tax shields for firms with cash flows that grow perpetually at a constant rate. We show that his formula is incorrect and provide an example where his valuation would admit arbitrage

In a forthcoming paper, Fernandez (2002) claims to derive a formula for the valuation of debt tax shields for firms with cash flows that grow perpetually at a constant rate. We show that his formula is incorrect

It is a well known problem the interactions between the market value of cash flows and the discount rate (usually the weighted average cost of capital, WACC) to calculate that value. This is mentioned in almost all textbooks in corporate finance. However, the solution adopted by most authors is...

In the standard Weighted Average Cost of Capital (WACC) applied to the free cash flow (FCF), we assume that the cost of debt is the market, unsubsidized rate. With debt at the market rate and perfect capital markets, debt only creates value in the presence of taxes through the tax shield. In...

In the Weighted Average Cost of Capital (WACC) applied to the free cash flow (FCF), we assume that the cost of debt is the market, unsubsidized rate. With debt at the market rate and perfect capital markets, debt only creates value in the presence of taxes through the tax shield. In some cases,...

In theory, different valuation methods, with consistent assumptions, must give identical results. Numerical examples that purport to illustrate the theory should demonstrate the identical results. Unfortunately, in popular textbooks it is all too easy to find numerical examples that are at odds...

Risk-neutral valuation is simple, elegant and central in option pricing theory. However, in teaching risk-neutral valuation, it is not easy to explain the concept of quot;risk-neutralquot; probabilities. Beginners who are new to risk-neutral valuation always have lingering doubts about the...