VALUATION RELATIONSHIPS UNDER GROWTH
Keywords:
Cost of capital, return on equity, tax shield value, levered betaAbstract
One of the most important topics on valuation is the appropriate relationships between cash flows and rate of returns. I review those relationships under the premise, by Myers (1974), of the cost of debt as the right discount for the tax shield. Different hypotheses have been advanced for the tax shield risk, each one producing different valuation results, especially when growth is present. The consequences of some common mistakes on valuation are explored. One difference between the results I obtain and results by others is the presence of growth in the expressions for the discount rates, which can be used to asses the empirical validity of each of the approaches.
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