Tony Appleyard (Professor of Accounting and Finance and Reader in Business Economics and Finance in the Department of Accounting and Finance, University of Newcastle upon Tyne.,) Ian M. Dobbs
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The relationship between debt policy and valuation has been extensively analysed in the finance literature; within a Modigliani-Miller framework, the consensus is that valuation is affected by whether debt is managed actively or passively, and that for finite projects with time varying risky cash flows, it is appropriate to use a weighted average discount rate for valuation only if it is assumed that debt is actively managed. In this paper, the relationship between debt policy and valuation is re-examined. In particular, it is shown that, under one of the most plausible forms of passive debt policy, valuation using a simple weighted average discount rate is in fact possible. Copyright Blackwell Publishers Ltd 1997.
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