Valuation theory does not specify the combined impact of both growth and the tax shield of debt on the cost of capital, the cost of equity, and systematic risk. This paper fills that gap in the literature. Our results demonstrate that the widely used Mamp;M models are inappropriate for a firm...

For an individual or company that is subject to taxes, we develop a method that uses laddered Separate Trading of Registered Interest and Principal (STRIP) bonds to determine the value (and composition) of a portfolio that replicates a risk-free after-tax cash flow that will occur on a single...

Keynes (1923) and Hicks (1939), hypothesized that futures prices are downward biased estimates of expected spot prices. Any empirical study that employs returns on futures contracts is actually a joint test of both the Keynes-Hicks hypothesis and of the assumed model of returns. Models based on...

Many companies have granted large numbers of employee incentive stock options, and there is intense debate as to how they should be reported on financial statements. According to the mission statements of the regulatory organizations responsible for financial statements, the primary purpose of...

We develop and apply a valuation model that quantifies the interest rate risk inherent in fixed rate reverse mortgages. Consistent with intuition, our results show that the interest rate risk of a reverse mortgage is greater than that of either a typical coupon bond or a regular mortgage....

According to recent surveys, most companies use discounted-cash-flow (DCF) methods to evaluate capital budgeting decisions. DCF methods typically assume that a project's initial cash outlay (ICO) is known with certainty. However, many types of initial outlays have substantial uncertainty,...

This paper addresses the relationship between the capital structure and the systematic risk of common equity for a firm whose capital structure includes convertible securities. Adding warrants to the capital structure reduces the systematic risk of equity, which is consistent with the fact that...

Many financial analysts and investors believe that measures of cash flow are extremely useful when analyzing the financial health and prospects of a company. In recent years, a measure called “free cash flow” has become widely used. However, many different definitions and ways to calculate...

We provide a method for calculating the cost of equity and the cost of capital in the presence of convertible securities and employee stock options. We demonstrate how this approach can be applied if a company already has issued convertible claims or if it is considering doing so for the first...