The Weighted Average Cost of Capital as a Cutoff Rate: A Critical Analysis of the Classical Textbook Weighted Average

Arditti, Fred D.; Levy, Haim

doi:10.2307/3665253

Cited by 57 publications

(63 citation statements)

References 5 publications

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“…One problem with equation [25] is that DT can be understood as D α T / α. At first glance, α can be anything related or unrelated to the company that we are valuing.…”

Section: The Value Of Tax Shields For Perpetuities In a World Withoutmentioning

confidence: 99%

The Correct Value of Tax Shields. An Analysis of 23 Theories

Fernández

2001

SSRN Journal

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This paper provides guidelines for evaluating the appropriateness of 23 different valuation methods for estimating the present value of tax shields. We first show that the value of tax shields is the difference between the present values of two different cash flows with their own risks: the present value of taxes for the unleveraged company and the present value of taxes for the leveraged company. This implies, as a first guideline, that for the particular case of a perpetuity and a world without costs of leverage, the value of tax shields is equal to the tax rate times the value of debt. The value of tax shields can be lower when costs of leverage exist. In that case, we show that, since the existence of leverage costs is independent of taxes, a second guideline for the appropriateness of the valuation method should be that the value of tax shields when there are no taxes is negative. We then look at the case of constant growth and derive similar conclusions.

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“…One problem with equation [25] is that DT can be understood as D α T / α. At first glance, α can be anything related or unrelated to the company that we are valuing.…”

Section: The Value Of Tax Shields For Perpetuities In a World Withoutmentioning

confidence: 99%

The Correct Value of Tax Shields. An Analysis of 23 Theories

Fernández

2001

SSRN Journal

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“…Myers capitalizes tax shields at the cost of debt. Arditti and Levy (1977) suggest that firm value can be calculated by discounting the capital cash flows instead of the free cash flow.…”

Section: Introductionmentioning

confidence: 99%

The slicing approach to valuing tax shields

Liu¹

2009

Journal of Banking & Finance

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“…(a) The demand function, D(P), must be such that D'(P) is strictly negative and that D"(P) is less than or equal to zero which would be the case where expected demand decreases as price increases; (b) The variable cost of the salvage operation is such that as the size of the operation increases, the variable cost decreases, i.e. C:(a) is strictly negative while C:(a) is greater than or equal to zero; (c) The fixed salvage cost increases as the operation gets larger or where F:(a) is strictly positive while F:(a) is greater than or equal to zero; Arditti (1973) and Haley and Schall (1978).…”

Section: The Firm'smentioning

confidence: 99%

Investment in salvage equipment

1992

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Manufacturers are faced with three options for disposing of excess finished items: they can (1) continue to mark down the item until it sells; (2) dispose of or scrap it; or (3) salvage it in order to reclaim valuable raw materials and components. In many situations the option of a markdown is not viable, thus the choice is to either scrap or salvage. Although many manufacturers have invested in salvage equipment, they have not deduced the impact of this investment as it affects not only the risk‐adjusted value of the project but also the production run size and the selling price. Hence, their decisions frequently turn out to be suboptimal. This paper develops a project‐valuation model that adds a new dimension to traditional capital budgeting decisions by incorporating salvage capacity.

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The Weighted Average Cost of Capital as a Cutoff Rate: A Critical Analysis of the Classical Textbook Weighted Average

Cited by 57 publications

References 5 publications

The Correct Value of Tax Shields. An Analysis of 23 Theories

The Correct Value of Tax Shields. An Analysis of 23 Theories

The slicing approach to valuing tax shields

Investment in salvage equipment

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