We consider a multinational firm that seeks to maximize its total amount of interest tax shield w... more We consider a multinational firm that seeks to maximize its total amount of interest tax shield while following a constant debt ratio policy on a global level. The firm's total interest tax shield can then be considered as a piecewise-linear increasing function that is concave with respect to the firm's value. As a result, the expected interest tax shield can be much safer than the firm's free cash flow, depending on the firm's current value. With a simple no-arbitrage model, we derive the discount factor to apply to the total interest tax shield expected by the multinational firm. We show that this formula generalizes standard results of the literature on interest tax shields valuation.
ABSTRACT In a recent paper, Jennergren analyzes four loan subsidy valuation methods suggested in ... more ABSTRACT In a recent paper, Jennergren analyzes four loan subsidy valuation methods suggested in authoritative text books. He shows that the first three can be derived from a unique formula whose value depends on the nonsubsidized loan amount that is assumed to be replaced by the subsidized loan. When the WACC method is used, this debt replacement must implicitly take into account the target debt-to-value ratio set by the firm. In this note, we suggest an alternative approach which allows us to clearly incorporate the corresponding debt constraint and to determine the resulting adjustment to be made. This adjustment appears to be different from that recommended by Jennergren. More generally, we suggest an alternative view of the consistency of the methods.
ABSTRACT This article uses different standpoints to approach the question of the consistency of p... more ABSTRACT This article uses different standpoints to approach the question of the consistency of project valuation methods. It shows that the NPV of a project can be obtained by discounting adjusted operating cash flows at a different rate from the risk-adjusted discount rate which should normally be used. Each of the conventional project valuation methods (standard WACC, equity residual, Arditti-Levy, APV) accordingly corresponds to a specific choice of the discount rate. Thus the convergence of these methods is obvious when the risk-adjusted discount rate integrates a debt ratio equal to that of the project. Moreover, we obtain the Modigliani-Miller relationship generalized to the case of a project of any duration.
Abstract We develop a partial equilibrium framework to assess the opportunity cost of domestic oi... more Abstract We develop a partial equilibrium framework to assess the opportunity cost of domestic oil consumption for an oil-exporting country. We show that the opportunity cost depends on various factors, including the constraints to which the oil producer is subject and the domestic oil pricing scheme. Moreover, through an application of the envelope theorem, we assess net welfare gains that can be generated from a reform of the domestic oil price. Our results show that the most efficient pricing policy is to set the domestic price equal to the opportunity cost. A numerical illustration for Saudi Arabia is provided to demonstrate the practical value of the proposed framework. Our findings can inform public decision-making for projects and policies that impact oil demand.
... pp. 2441. Full Text via CrossRef. Graham and Harvey, 2001 JR Graham and CRHarvey, The theory... more ... pp. 2441. Full Text via CrossRef. Graham and Harvey, 2001 JR Graham and CRHarvey, The theory and practice of corporate finance: Evidence from the field, Journal of Financial Economics 60 (2001), pp. 187243. Article ...
The Quarterly Review of Economics and Finance, Nov 1, 2009
... pp. 2441. Full Text via CrossRef. Graham and Harvey, 2001 JR Graham and CRHarvey, The theory... more ... pp. 2441. Full Text via CrossRef. Graham and Harvey, 2001 JR Graham and CRHarvey, The theory and practice of corporate finance: Evidence from the field, Journal of Financial Economics 60 (2001), pp. 187243. Article ...
We consider a multinational firm that seeks to maximize its total amount of interest tax shield w... more We consider a multinational firm that seeks to maximize its total amount of interest tax shield while following a constant debt ratio policy on a global level. The firm's total interest tax shield can then be considered as a piecewise-linear increasing function that is concave with respect to the firm's value. As a result, the expected interest tax shield can be much safer than the firm's free cash flow, depending on the firm's current value. With a simple no-arbitrage model, we derive the discount factor to apply to the total interest tax shield expected by the multinational firm. We show that this formula generalizes standard results of the literature on interest tax shields valuation.
ABSTRACT In a recent paper, Jennergren analyzes four loan subsidy valuation methods suggested in ... more ABSTRACT In a recent paper, Jennergren analyzes four loan subsidy valuation methods suggested in authoritative text books. He shows that the first three can be derived from a unique formula whose value depends on the nonsubsidized loan amount that is assumed to be replaced by the subsidized loan. When the WACC method is used, this debt replacement must implicitly take into account the target debt-to-value ratio set by the firm. In this note, we suggest an alternative approach which allows us to clearly incorporate the corresponding debt constraint and to determine the resulting adjustment to be made. This adjustment appears to be different from that recommended by Jennergren. More generally, we suggest an alternative view of the consistency of the methods.
ABSTRACT This article uses different standpoints to approach the question of the consistency of p... more ABSTRACT This article uses different standpoints to approach the question of the consistency of project valuation methods. It shows that the NPV of a project can be obtained by discounting adjusted operating cash flows at a different rate from the risk-adjusted discount rate which should normally be used. Each of the conventional project valuation methods (standard WACC, equity residual, Arditti-Levy, APV) accordingly corresponds to a specific choice of the discount rate. Thus the convergence of these methods is obvious when the risk-adjusted discount rate integrates a debt ratio equal to that of the project. Moreover, we obtain the Modigliani-Miller relationship generalized to the case of a project of any duration.
Abstract We develop a partial equilibrium framework to assess the opportunity cost of domestic oi... more Abstract We develop a partial equilibrium framework to assess the opportunity cost of domestic oil consumption for an oil-exporting country. We show that the opportunity cost depends on various factors, including the constraints to which the oil producer is subject and the domestic oil pricing scheme. Moreover, through an application of the envelope theorem, we assess net welfare gains that can be generated from a reform of the domestic oil price. Our results show that the most efficient pricing policy is to set the domestic price equal to the opportunity cost. A numerical illustration for Saudi Arabia is provided to demonstrate the practical value of the proposed framework. Our findings can inform public decision-making for projects and policies that impact oil demand.
... pp. 2441. Full Text via CrossRef. Graham and Harvey, 2001 JR Graham and CRHarvey, The theory... more ... pp. 2441. Full Text via CrossRef. Graham and Harvey, 2001 JR Graham and CRHarvey, The theory and practice of corporate finance: Evidence from the field, Journal of Financial Economics 60 (2001), pp. 187243. Article ...
The Quarterly Review of Economics and Finance, Nov 1, 2009
... pp. 2441. Full Text via CrossRef. Graham and Harvey, 2001 JR Graham and CRHarvey, The theory... more ... pp. 2441. Full Text via CrossRef. Graham and Harvey, 2001 JR Graham and CRHarvey, The theory and practice of corporate finance: Evidence from the field, Journal of Financial Economics 60 (2001), pp. 187243. Article ...
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