A more realistic valuation: APV and WACC with constant book leverage ratio
AbstractWe value a company that targets its capital structure in book-value terms. This capital structure definition provides us with a valuation that lies between those of Modigliani-Miller (fixed debt) and Miles-Ezzell (fixed market-value leverage ratio). We show that if a company targets its leverage in market-value terms, it has less value than if it targets the leverage in book-value terms. We also present empirical evidence that permits us to conclude that debt is more related to the book-value of the assets than to their market-value.
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Bibliographic InfoPaper provided by IESE Business School in its series IESE Research Papers with number D/715.
Length: 15 pages
Date of creation: 07 Nov 2007
Date of revision:
value of tax shields; required return to equity; company valuation; cost of equity;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
This paper has been announced in the following NEP Reports:
- NEP-ACC-2008-02-02 (Accounting & Auditing)
- NEP-ALL-2008-02-02 (All new papers)
- NEP-CFN-2008-02-02 (Corporate Finance)
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