Авторы: 159 А Б В Г Д Е З И Й К Л М Н О П Р С Т У Ф Х Ц Ч Ш Щ Э Ю Я

Книги:  184 А Б В Г Д Е З И Й К Л М Н О П Р С Т У Ф Х Ц Ч Ш Щ Э Ю Я

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Financial literature about discounted cash flow valuation - Pablo Fernández

Financial literature about discounted cash flow valuation

Pablo Fernandez

IESE Business School

Camino del Cerro del Aguila 3. 28023 Madrid, Spain.

E-mail: fernandezpa@iese.edu

Abstract

There is a wealth of literature about discounted cash flow valuation. In this paper, we will discuss the

most important papers, highlighting those that propose different expressions for the value of the tax shield

(VTS).

The discrepancies between the various theories on the valuation of a company’s equity using

discounted cash flows originate in the calculation of the value of the tax shield (VTS). This paper illustrates and

analyzes 7 different theories and presents a new interpretation of the theories.

June 14, 2005

JEL classification: G12; G31; G32

Keywords: discounted cash flow valuation, cash flow valuation, Value of tax shields, present value of the net

increases of debt, required return to equity

Pablo Fernánde z Financial literature about discounted cash flow valuation

There is a wealth of literature about discounted cash flow valuation. In this paper, we discuss the most

important papers1, highlighting those that propose different expressions for the value of the tax shield (VTS).

The discrepancies between the various theories on the valuation of a company’s equity using

discounted cash flows originate in the calculation of the value of the tax shield (VTS). This paper illustrates and

analyzes 7 different theories on the calculation of the VTS: Fernandez (2004), Myers (1974), Miller (1977),

Miles & Ezzell (1980), Harris & Pringle (1985), Ruback (1995), Damodaran (1994), and the practitioners’

method. We show that Myers’ method (1974) gives inconsistent results for growing companies. This paper also

presents a new interpretation of the theories: it is considered that the difference between the company’s value

given by Fernandez (2004) (zero failure costs) and the company’s value given by these theories is the leverage

cost. When analyzing the results obtained by the different theories, it is advisable to remember that the VTS is

not exactly the present value of the tax shield discounted at a certain rate but the difference between two present

values: the present value of the taxes paid by the unlevered company less the present value of the taxes paid by

the levered company. The risk of the taxes paid by the unlevered company is smaller than the risk of the taxes

paid by the levered company.