IDEAS home Printed from https://ideas.repec.org/a/bla/eufman/v14y2008i1p152-162.html
   My bibliography  Save this article

On the Equivalence between the APV and the "wacc" Approach in a Growing Leveraged Firm

Author

Listed:
  • Mario Massari
  • Francesco Roncaglio
  • Laura Zanetti

Abstract

"While in a steady state framework the choice between the wacc approach (""Modigliani-Miller, 1963"") and the adjusted present value (APV) approach (""Myers, 1974"") is irrelevant since the two approaches provide the same result, however, in a growing firm context the wacc equation seems to be inconsistent with the APV result. In this paper we propose a simple model to evaluate the tax savings in a growing firm in order to show under which assumptions the two approaches lead to the same results. We demonstrate that the use of the wacc model in a steady-growth scenario gives rise to some unusual assumptions with regard to the discount rates to be used in calculating tax shields. We show that the widely used wacc formula, if used, as it is in most cases, in a growth context, implies that a) debt tax shield related to already existing debt are discounted using k d ; b) debt tax shield related to new debt, due to company's growth, are discounted, according to a mixed procedure, using both k u and k d . We discuss the inconsistency of such a discounting procedure and the preferred features of the APV approach." Copyright 2007 The Authors Journal compilation (c) 2007 Blackwell Publishing Ltd.

Suggested Citation

  • Mario Massari & Francesco Roncaglio & Laura Zanetti, 2008. "On the Equivalence between the APV and the "wacc" Approach in a Growing Leveraged Firm," European Financial Management, European Financial Management Association, vol. 14(1), pages 152-162.
  • Handle: RePEc:bla:eufman:v:14:y:2008:i:1:p:152-162
    as

    Download full text from publisher

    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-036X.2007.00392.x
    File Function: link to full text
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sarmiento-Sabogal, Julio & Sadeghi, Mehdi, 2014. "Unlevered betas and the cost of equity capital: An empirical approach," The North American Journal of Economics and Finance, Elsevier, vol. 30(C), pages 90-105.
    2. Ronald W. Spahr & Pankaj K. Jain & Fariz Huseynov & Bhavik Rajesh Parikh, 2012. "Tax policy and macro-finance in a competitive global economy where government is considered as firms' third financial stakeholder," Global Business and Economics Review, Inderscience Enterprises Ltd, vol. 14(1/2), pages 30-66.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:eufman:v:14:y:2008:i:1:p:152-162. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley Content Delivery) or (Christopher F. Baum). General contact details of provider: http://edirc.repec.org/data/efmaaea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.