Adjustment of the WACC with Subsidized Debt in the Presence of Corporate Taxes: The N-Period Case
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.
Volume (Year): 4 (2005)
Issue (Month): (October)
|Contact details of provider:|| Web page: http://www.economistascoruna.org/eawp/|
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ignacio Vélez-Pareja, 2004. "Modeling the Financial Impact of Regulatory Policy: Practical Recommendations and Suggestions. The Case of World Bank," PROYECCIONES FINANCIERAS Y VALORACION 003228, MASTER CONSULTORES.
- Joseph Tham & Ignacio Velez-Pareja Velez-Pareja, 2005. "With Subsidized Debt How do we Adjust the WACC?," PROYECCIONES FINANCIERAS Y VALORACION 003783, MASTER CONSULTORES.
- Ignacio Vélez-Pareja, 2007.
"Cash Flow Valuation in an Inflactionary World. The Case of World Bank for Regulated Firms,"
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. 6, pages 1-19, November.
- Ignacio Velez-Pareja, 2005. "Cash Flow Valuation in an Inflationary World. The Case of World Bank for Regulated Firms," PROYECCIONES FINANCIERAS Y VALORACION 002109, MASTER CONSULTORES.
- Ignacio Velez-Pareja & Joseph Tham, 2005. "Proper Solution of Circularity in the Interactions of Corporate Financing and Investment Decisions: A Reply to the Financing Present Value A," PROYECCIONES FINANCIERAS Y VALORACION 003395, MASTER CONSULTORES.
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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jose González Seoane)
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.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with 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 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.