IDEAS home Printed from https://ideas.repec.org/a/eac/articl/14-04.html

Adjustment of the WACC with Subsidized Debt in the Presence of Corporate Taxes: The N-Period Case

Author

Listed:
  • Ignacio Vélez-Pareja

    (Politécnico Grancolombiano.)

  • Joseph Tham

    (Duke University. EEUU.)

  • Viviana Fernández

    (Universidad de Chile.)

Abstract

In the Weighted Average Cost of Capital (WACC) applied to the free cash flow (FCF), we assume that the cost of debt is the market, unsubsidized rate. With debt at the market rate and perfect capital markets, debt only creates value in the presence of taxes through the tax shield. In some cases, the firm may be able to obtain a loan at a rate that is below the market rate. With subsidized debt and taxes, there would be a benefit to debt financing, and the unleveraged and leveraged values of the cash flows would be unequal. The benefit of lower tax savings are offset by the benefit of the subsidy. These two benefits have to be introduced explicitly. In this paper we present the adjustments to the WACC with subsidized debt and taxes and the cost of leveraged equity for multiple periods. We demonstrate the analysis for both the WACC applied to the FCF and the WACC applied to the capital cash flow (CCF). We use the calculation of the Adjusted Present Value, APV, to consider both, the tax savings and the subsidy. We show how all the methods match.

Suggested Citation

  • Ignacio Vélez-Pareja & Joseph Tham & Viviana Fernández, 2005. "Adjustment of the WACC with Subsidized Debt in the Presence of Corporate Taxes: The N-Period Case," Economic Analysis Working Papers (2002-2010). Atlantic Review of Economics (2011-2016), Colexio de Economistas de A Coruña, Spain and Fundación Una Galicia Moderna, vol. 4, pages 1-19, October.
    • Handle: RePEc:eac:articl:14/04
    as

    Download full text from publisher

    File URL: http://www.economistascoruna.org/eawp/eawp.asp?qsa=ES&qsb=1&qsc=11&qsd=154
    Download Restriction: no
    ---><---

    Other versions of this item:

    More about this item

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • 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
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate

    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:eac:articl:14/04. See general information about how to correct material in RePEc.

    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 bibliographic 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Jose González Seoane (email available below). General contact details of provider: https://edirc.repec.org/data/cecorea.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.