WACC Is Not an Expected Return of the Levered Firm

Loeffler, Andreas

doi:10.2139/ssrn.340300

Cited by 3 publications

(3 citation statements)

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“…That is also where theorems on the relation between cost of capital and conditional expected returns are found. Löffler (2002) points out the problem of the Modigliani-Miller adjustment. In an earlier discussion Fernández (2004), Fieten et al (2005), and Cooper and Nyborg (2006) clarify the relation between Modigliani-Miller and Miles-Ezzell.…”

Section: Further Literaturementioning

confidence: 99%

Corporate Income Tax: WACC, FTE, TCF, APV

Kruschwitz

Löffler

2020

Springer Texts in Business and Economics

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There is a variety of problems in the valuation of firms. That is why the evaluator has to make some simplifications in order to come up with a result. That also goes for the theory of valuation. We will take the first step in assuming that the firm has no debt. In simplifying with this assumption, we shall see that a number of economic problems can be discussed. In the next step we will turn to indebted firms. 3.1 Unlevered Firms Whoever has to value levered firms, also has to be able to value unlevered firms. Both are mutually conditional. By itself, this claim does not shed any light. It should be understood that if a levered firm is spoken of without naming any further details, then that remains unclear. Are we dealing with a heavily or only moderately levered firm? Will the firm's debt increase, or are the responsible managers planning to reduce the firm's credit volume? In contrast to a levered firm in which this must all be explained in detail, the circumstances of an unlevered firm are clear and simple. When we speak of an unlevered firm, we mean a firm, which will not have debts today, nor anytime in the future. Of course it is difficult to believe that there are actually such firms in our world. But this-no doubt fully correct assessment-does not matter here. All we want to state is that what we mean by an unlevered firm is completely straightforward, while by a levered firm it is not so clear without further information. Cost of Capital and Leverage A firm's cost of capital essentially depends upon two influences: firstly, the firm's business risk, and secondly, its indebtedness. It is fundamentally valid that the greater the risk is and the greater the firm's debt-equity ratio is, that much higher the expected returns are. And if we make the connection between this law and the considerations of the preceding paragraph, then the cost

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Section: Further Literaturementioning

confidence: 99%

Corporate Income Tax: WACC, FTE, TCF, APV

Kruschwitz

Löffler

2020

Springer Texts in Business and Economics

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“…Autoregressive cash flows were introduced in a more general form by Lintner (1956) and Rubinstein (1976), and used by Ohlson (1979), Garman and Ohlson (1980) and Christensen and Feltham (2003). Our specific formulation of weak autoregressive cash flows was first systematically examined in Laitenberger and Löffler (2002). Our specific formulation of weak autoregressive cash flows was first systematically examined in Laitenberger and Löffler (2002).…”

Section: Further Literaturementioning

confidence: 99%

“…In Barberis et al (1998) a violation of autoregression was considered, although in a very different context. Löffler (2002) points out the problem of the Modigliani-Miller adjustment. That is also where theorems on the relation between cost of capital and conditional expected returns are found.…”

Section: Further Literaturementioning

confidence: 99%

Corporate Income Tax

Kruschwitz¹,

Löffler²

2005

Discounted Cash Flow

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Remark: The slightly expanded second edition (Springer, open access) has different enumeration than the first (Wiley). We use Springer's enumeration in the slides and Wiley's in the videos. , Outline 3.1 Unlevered firms Similar companies Notation 3.1.1 Valuation equation 3.1.2 Weak autoregressive cash flows Independent and uncorrelated increments Gordon-Shapiro Discount rates 3.1.3 Example (continued) The finite case The infinite case , The unlevered firm 1 Companies are indebted, i.e. levered. Why should we consider unlevered firms, i.e. firms without debt? Valuation requires knowledge of ▶ cash flows ⇐= from business plans, annual balance sheets etc.

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Sull'Impiego dell'Approccio DCF per la Misurazione del Valore

Barbi

2008

SSRN Journal

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WACC Is Not an Expected Return of the Levered Firm

Cited by 3 publications

References 2 publications

Corporate Income Tax: WACC, FTE, TCF, APV

Corporate Income Tax: WACC, FTE, TCF, APV

Corporate Income Tax

Sull'Impiego dell'Approccio DCF per la Misurazione del Valore

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