It is widely known that if the leverage is constant over time, then the after-tax Weighted Average Cost of Capital (WACC) is constant over time. In other words, it is inappropriate to use a constant after-tax WACC to discount the free cash flow (FCF) if the leverage changes over time. However,...

It is widely known that if the leverage is constant over time, then the cost of equity and the Weighted Average Cost of Capital (WACC) for the free cash flow, FCF, is constant over time. In other words, it is inappropriate to use a constant WACCFCF to discount the free cash flow (FCF) if the...

In this note, we show that with respect to the Miles and Ezzell (Mamp;E) Weighted Average Cost of Capital (WACC), the return to levered equity for finite cash flows is constant if the debt-equity ratio is constant. We assume that the reader is familiar with the Mamp;E WACC. The expression that...

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...

The typical assumption about cashflows in perpetuity is not appropriate in practical project appraisal because the length of project life is always finite. In this paper, I discuss the calculation of multiperiod financial discount rates for a project with a finite life. For simplicity, I assume...

In the financial appraisal of a project, the cashflow statements are constructed from two points of view: The Total Investment (TI) Point of View and Equity Point of View. One of the most important issues is the estimation of the correct financial discount rates for the two points of view. In...

In the recent writings on valuation, there is no consensus about the correct formulas for calculating the relevant cost of capital in an M amp; M world. The proliferation of alpha number of methods and omega number of theories for the calculation of the cost of capital is puzzling because in the...

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...

Recently, the residual income (RI) model has become very popular in valuation because it purports to measure quot;value addedquot; by explicitly taking into account the cost for capital in the income statement. Some proponents of the residual income approach have even suggested that the RI model...

The discount rate for the tax shield depends on the risk of the tax shield. If the tax shield is risk-free, then the appropriate discount rate for the tax shield is the risk-free rate rf. If the debt is risky, then we must make the distinction between the contractual return and the expected...