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Constant Leverage and Constant Cost of Capital: A Common Knowledge Half-Truth

Автор
Ибрагимов Рауф Габбасович
 
Соавторы
Velez-Pareja Ignacio, Tham Joseph
 
Тип публикации
Статья
 
Язык публикации
Русский
 
Аффилиация
Russian Presidential Academy of National Economy and Public Administration Graduate School of finance and management
 
Издательство
Estudios Gerenciales: 24 (107)
 
Год
2008
 
Количество страниц
13-33
 

Аннотация
A typical approach for valuing finite cash flows is to assume that leverage is constant (usually as target leverage) and the cost of equity, Ke and the Weighted Average Cost of Capital, WACC are also assumed to be constant. For cash flows in perpetuity, and with the cost of debt, Kd as the discount rate for the tax shield, it is indeed the case that the Ke and WACC applied to the FCF are constant if the leverage is constant. However, this does not hold true for finite cash flows. In this document, we show that for finite cash flows, Ke and hence WACC depend on the discount rate that is used to value the tax shield, TS and as expected, Ke and WACC are not constant with Kd as the discount rate for the tax shield, even if the leverage is constant. We illustrate this situation with a simple example. We analyze five methods: DCF using APV, FCF and traditional and general formulation for WACC, present value of CFE plus debt and Capital Cash Flow, CCF

Ключевые слова
WACC, constant cost of capital, constant leverage, cash flows.

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