Abstract
Original language | English |
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Pages (from-to) | 830 - 836 |
Number of pages | 7 |
Journal | European Financial Management |
Volume | 19 |
Issue number | 4 |
DOIs | |
Publication status | Published - 2013 |
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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 journal › Article › Research › peer-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 -