Consistent cash flow valuation with tax-deductible debt: A clarification

Michael Joseph Dempsey

    Research output: Contribution to journalArticleResearchpeer-review

    7 Citations (Scopus)

    Abstract

    Massari et al. (2008) argue that the weighted average cost of capital (WACC) approach to discounting expected cash flows is generally inconsistent with the adjusted present value (APV) approach. We show that their argument results from, first, taking a WACC expression that assumes a fixed level of debt in perpetuity and applying it to a scenario where the debt level varies stochastically; and, second, discounting the tax savings from stochastic debt at the rate appropriate for fixed debt. Our paper draws attention to the fundamental proposition by which such errors are avoided when cross-referencing valuation methods. The outcome is that the APV and WACC methods are shown to be algebraically consistent with each other.
    Original languageEnglish
    Pages (from-to)830 - 836
    Number of pages7
    JournalEuropean Financial Management
    Volume19
    Issue number4
    DOIs
    Publication statusPublished - 2013

    Cite this

    Dempsey, Michael Joseph. / Consistent cash flow valuation with tax-deductible debt: A clarification. In: European Financial Management. 2013 ; Vol. 19, No. 4. pp. 830 - 836.
    @article{5290071515ec41c7a2fe7f6911dc457c,
    title = "Consistent cash flow valuation with tax-deductible debt: A clarification",
    abstract = "Massari et al. (2008) argue that the weighted average cost of capital (WACC) approach to discounting expected cash flows is generally inconsistent with the adjusted present value (APV) approach. We show that their argument results from, first, taking a WACC expression that assumes a fixed level of debt in perpetuity and applying it to a scenario where the debt level varies stochastically; and, second, discounting the tax savings from stochastic debt at the rate appropriate for fixed debt. Our paper draws attention to the fundamental proposition by which such errors are avoided when cross-referencing valuation methods. The outcome is that the APV and WACC methods are shown to be algebraically consistent with each other.",
    author = "Dempsey, {Michael Joseph}",
    year = "2013",
    doi = "10.1111/j.1468-036X.2011.00625.x",
    language = "English",
    volume = "19",
    pages = "830 -- 836",
    journal = "European Financial Management",
    issn = "1354-7798",
    publisher = "Wiley-Blackwell",
    number = "4",

    }

    Consistent cash flow valuation with tax-deductible debt: A clarification. / Dempsey, Michael Joseph.

    In: European Financial Management, Vol. 19, No. 4, 2013, p. 830 - 836.

    Research output: Contribution to journalArticleResearchpeer-review

    TY - JOUR

    T1 - Consistent cash flow valuation with tax-deductible debt: A clarification

    AU - Dempsey, Michael Joseph

    PY - 2013

    Y1 - 2013

    N2 - Massari et al. (2008) argue that the weighted average cost of capital (WACC) approach to discounting expected cash flows is generally inconsistent with the adjusted present value (APV) approach. We show that their argument results from, first, taking a WACC expression that assumes a fixed level of debt in perpetuity and applying it to a scenario where the debt level varies stochastically; and, second, discounting the tax savings from stochastic debt at the rate appropriate for fixed debt. Our paper draws attention to the fundamental proposition by which such errors are avoided when cross-referencing valuation methods. The outcome is that the APV and WACC methods are shown to be algebraically consistent with each other.

    AB - Massari et al. (2008) argue that the weighted average cost of capital (WACC) approach to discounting expected cash flows is generally inconsistent with the adjusted present value (APV) approach. We show that their argument results from, first, taking a WACC expression that assumes a fixed level of debt in perpetuity and applying it to a scenario where the debt level varies stochastically; and, second, discounting the tax savings from stochastic debt at the rate appropriate for fixed debt. Our paper draws attention to the fundamental proposition by which such errors are avoided when cross-referencing valuation methods. The outcome is that the APV and WACC methods are shown to be algebraically consistent with each other.

    U2 - 10.1111/j.1468-036X.2011.00625.x

    DO - 10.1111/j.1468-036X.2011.00625.x

    M3 - Article

    VL - 19

    SP - 830

    EP - 836

    JO - European Financial Management

    JF - European Financial Management

    SN - 1354-7798

    IS - 4

    ER -