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Matching Methods in Valuation with Finite Cash Flows : An Almost Perfect Textbook Example
Tham, Joseph - 2019
In this note, we extend a numerical example in the textbook by Berk & DeMarzo that matches methods for only when K<sub>TS</sub> is equal to K<sub>D</sub>. We show that there is a generalized formulation for the return to levered equity K<sub>E</sub> that works for any value of K<sub>TS</sub>, the appropriate discount rate for the tax...
Persistent link: https://www.econbiz.de/10012889082
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The Unbearable Longevity of the Classic Free Cash Flow (FCF) WACC : A Nontechnical Retrospection
Tham, Joseph - 2019
In this short note, we present a nontechnical retrospection on the unbearable longevity of the classic WACC (Weighted Average Cost of Capital) for the Free Cash Flow (FCF) in perpetuity. Over the past two decades, researchers in finance have increased greatly our understanding of the properties...
Persistent link: https://www.econbiz.de/10012890819
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Cash Flows in Perpetuity with Different Growth Rates for the FCF and the Debt : A Numerical Illustration
Tham, Joseph - 2019
In this note, we present a simple numerical example to illustrate the case where the growth rate for the Free Cash Flow (FCF) gU is greater than but different from the growth rate for the Cash Flow to Debt (CFD) gD. Here we assume that the value of the appropriate discount rate for the tax...
Persistent link: https://www.econbiz.de/10012869300
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Two Fundamental Principles for Cash Flow Valuation (CFV)
Tham, Joseph - 2019
In this note, we discuss two fundamental principles for Cash Flow Valuation (CFV). We hope that adherence to these two principles will improve the practice of CFV. These principles are general, relatively uncontroversial, and should be acceptable as starting points for cash flow valuation....
Persistent link: https://www.econbiz.de/10012871063
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Optimal Capital Structure (OCS) with a Finite Cash Flow : A Simple Numerical Illustration
Tham, Joseph - 2019
In this note, we present a simple numerical example, with a finite cash flow, to illustrate the concept of the Optimal Capital Structure (OCS). First, we assume that the discount rate for the tax benefits K<sub>TB</sub> equals the return to unlevered equity K<sub>U</sub>. The cost of debt K<sub>D</sub> is a simple linear...
Persistent link: https://www.econbiz.de/10012871362
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Goldilocks and the Three WACCs
Tham, Joseph - 2020
This paper presents three different approaches for calculating the levered annual values for a finite cash flow profile. In the first approach, we use K<sub>U</sub>, the return to unlevered equity to calculate the annual tax savings and use K<sub>U</sub> to calculate the (present) value of the tax savings. In the...
Persistent link: https://www.econbiz.de/10012832637
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the Weirdness and Absurdity of a Specific theory on the Present Value of the Tax Benefits (PVTB) from Debt Financing
Tham, Joseph - 2019
. The weirdness or absurdity of a theory does not automatically disqualify a theory; however, perhaps another review of the … implications of the theory may have some merit. It seems that the definition of the present value of the tax benefits (PVTB) was … revised to accommodate pre-existing ideas; perhaps the new theory is masquerading as a sort of reverse engineering …
Persistent link: https://www.econbiz.de/10012872291
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Cost of Equity and WACC for Perpetuities with Constant Growth
Mejia-Pelaez, Felipe - 2011
This paper presents a formal derivation of general expressions for Ke and WACC in perpetuities with constant growth, which do not make any assumption on what the proper discount rate is to be applied to the firm's tax shield, and are complemented with numerical examples of its application....
Persistent link: https://www.econbiz.de/10013133176
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The Weighted Average Cost of Capital (WACC) for Firm Valuation Calculations : A Reply
Velez-Pareja, Ignacio - 2012
Llano-Ferro (2009) proposes a solution to avoid 'significant errors' when the Weighted Average Cost of Capital (WACC) obtained by the standard formula leads to significant errors in Net Present Value of the Firm calculations; particularly in those that apply to perpetual cash flow series. In...
Persistent link: https://www.econbiz.de/10013116958
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Valuing Companies by Cash Flow Discounting : Only APV Does Not Require Iteration
Fernandez, Pablo - 2020
The most used methods for valuing companies by Cash Flow Discounting are equity cash flow, free cash flow, capital cash flow and APV (Adjusted Present Value). Only APV does not require iteration All four methods, if properly applied, always give the same value. This result is logical, as all the...
Persistent link: https://www.econbiz.de/10012824556