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Abstract:
A quarter-century ago, Miles and Ezzell (1980) solved the valuation problem of a firm that follows a constant leverage ratio L = D/S. However, to this day, the proper discounting of free cash flows and the computation of WACC are often misunderstood by scholars and practitioners alike. For example, it is common for textbooks and fairness opinions to discount free cash flows at WACC with beta input Bs = [1 + (1-t)L]Bu, although the latter is not consistent with the assumption of constant leverage. This confusion extends to the valuation of tax shields and the proper implementation of adjusted present value procedures. In this paper, we derive a general result on the value of tax shields, obtain the correct value of tax shields for perpetuities, and state the correct valuation formulas for arbitrary cash flows under a constant leverage financial policy.

Abstract:
A quarter-century ago, Miles and Ezzell (1980) solved the valuation problem of a firm that follows a constant leverage ratio L = D/S. However, to this day, the proper discounting of free cash flows and the computation of WACC are often misunderstood by scholars and practitioners alike. For example, it is common for textbooks and fairness opinions to discount free cash flows at WACC with beta input Bs = [1+(1-t)L]Bu, although the latter is not consistent with the assumption of constant leverage. This confusion extends to the valuation of tax shields and the proper implementation of adjusted present value procedures. In this paper, we derive a general result on the value of tax shields, obtain the correct value of tax shields for perpetuities, and state the correct valuation formulas for arbitrary cash flows under a constant leverage financial policy.

Tax shield valuation, WACC, APV, cost of capital, leveraged beta

Abstract:
We survey the literature analysing the price formation and trading process, and the consequences of market organization for price discovery and welfare. We develop a united perspective on theoretical, empirical and experimental approaches. We discuss the evidence on transaction costs and the price impact of trades and its analyses in terms of adverse selection, inventory costs and market power. We review the extent to which the associated frictions can be mitigated by such features of market design as the degree of transparency, the use of call auctions, the discreteness of the pricing grid and the regulation of competition between liquidity suppliers or exchanges.

Market microstructure, liquidity, bid-ask spread, market design, transactions costs

Abstract:
This study seeks to fill a gap in the research on the behavior of entrepreneurs, their decisions to develop their firms independently or with venture capitalists, and the relation to their abilities and to the value in making that ability known, even at a cost. Information asymmetry exists when venture capitalists find it difficult to assess the founder's entrepreneurial skills and abilities, which can impact the decision of entrepreneurs to seek venture capitalists, and the price that those investors may be willing to pay. A model is developed based on the principal-agent framework, which focuses on a risk-adverse entrepreneur in an independent setting, and is used to address three different situations concerning outside knowledge of an entrepreneur's abilities. The model shows that when the ability of entrepreneurs is common knowledge, they choose to involve risk-neutral venture capitalists. When the entrepreneur knows his or her skill level, but the venture capitalist does not, the less profitable ventures are the ones that are sold. The more skillful entrepreneurs retain their ventures. In situations where asymmetric information exists, it is possible for the entrepreneur to invest in information that makes his skill level known to the venture capitalists. When this happens, some less skillful entrepreneurs will still sell. An examination of equilibrium prices under this set of circumstances shows that the price for those ventures that are sold without using an available signal will be less than, or equal to, the prices of the ventures that are sold when a signal is not available. Highly-skilled entrepreneurs do not necessarily either generate a signal or develop their venture alone. The results of this analysis help to explain Bygrave's work that highlighted the poor return of venture capital investments. (SRD)

Signaling, Agency theory, Risk orientation, Information asymmetry, Behavior (individual), Skills, Firm financing, Early stage financing, Startups, Venture capitalists, Moral hazard problem