Fernandez [2004; The value of tax shields is NOT equal to the present value of tax shields. Journalof Financial Economics, 73, 145–165] claims to derive a formula for the valuation of debt tax shieldsfor firms with cash flows that growperpetually at a constant rate.We showthat his formula is...

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...

It is widely accepted that the correct discount rate for the tax shield depends on whether the value of the debt is a fixed amount or is a proportion of the value of the firm.In this pedagogical note, using a simple two period numerical example, I assume a fixed amount of debt and demonstrate...

Many firms have debt financing in a foreign currency. What are the tax implications of the foreign loan for the calculation of the Weighted Average Cost of Capital (WACC)? With a foreign loan, there are two effects. First, there is the standard tax savings from the interests deduction with the...

Many firms have debt financing in a foreign currency. What are the tax implications of the foreign loan for the calculation of the Weighted Average Cost of Capital (WACC)? With a foreign loan, there are two effects. First, there is the standard tax savings from the interest deduction with the...

Debt is rarely risk-free. Yet, on grounds of simplicity, in most discussions on the weighted average cost of capital (WACC), we assume that the debt is risk-free. At the same, in the calculation of the WACC, we may use a value for the cost of debt d that is higher than the risk-free rate rf. In...

In a typical market-based valuation, the standard procedure is to discount the expected free cash flow (EFCF) at the weighted average cost of capital (WACC) and the effect of financing is taken into account by adjusting the WACC. However, in many cases, it may be difficult to capture the various...

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...