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WACC, Value of Tax Savings and Terminal Value for Growing and Non Growing Perpetuities

Author

Listed:
  • Ignacio Velez-Pareja
  • Joseph Tham

Abstract

Although perpetuities are somewhat artificial in the sense that in practice they do not exist, they are relevant because no matter how detailed and complex a forecasted financial plan for a firm or project could be terminal value usually is calculated as perpetuity. This terminal value might be a growing or a non growing perpetuity. On the other hand, usually terminal value is a substantial part of the firm value. In this note we examine in detail the proper discount rate for cash flows in perpetuity, the present value of tax savings and the calculation of terminal value. The findings contradict what is generally accepted in the literature.

Suggested Citation

  • Ignacio Velez-Pareja & Joseph Tham, 2005. "WACC, Value of Tax Savings and Terminal Value for Growing and Non Growing Perpetuities," Proyecciones Financieras y Valoración 3768, Master Consultores.
    • Handle: RePEc:col:000463:003768
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    More about this item

    Keywords

    WACC; perpetuities;

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate

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