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Cost of Equity and WACC for Perpetuities with Constant Growth

Felipe Mejia-Pelaez

Internexa S.A. E.S.P.

Ignacio Velez-Pareja

Master Consultores

July 31, 2010

The Valuation Journal, Vol. 5, No. 2, pp. 89-121, 2010

This paper presents a formal derivation of general expressions for Ke and WACC in perpetuities with constant growth, which do not make any assumption on what the proper discount rate is to be applied to the firm’s tax shield, and are complemented with numerical examples of its application. Furthermore, because the most widely known approaches to market valuation of firm and equity make either an implicit or explicit assumption on the value the mentioned rate should take expressions for the value of the equivalent rate on each one of those cases are presented. In addition, a formula for the calculation of the impact on the firm and equity value of a variation on the discount rate for tax shield is proposed, which yields exact results for changes of any size.

Number of Pages in PDF File: 21

Keywords: Firm Valuation, Cost of Capital, Cost of Equity, Perpetuities, Constant Growth, Cash Flow, Free Cash Flow, WACC

JEL Classification: M21, M40, M46, M41, G12, G31, J33

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Date posted: August 1, 2010 ; Last revised: January 24, 2011

Suggested Citation

Mejia-Pelaez, Felipe and Velez-Pareja, Ignacio, Cost of Equity and WACC for Perpetuities with Constant Growth (July 31, 2010). The Valuation Journal, Vol. 5, No. 2, pp. 89-121, 2010. Available at SSRN: http://ssrn.com/abstract=1651662

Contact Information

Felipe Mejia-Pelaez (Contact Author)
Internexa S.A. E.S.P. ( email )
Calle 12 sur N° 18
168, Bloque 5
Ignacio Velez-Pareja
Master Consultores ( email )
Ave Miramar # 18-93 Apt 6A
+575 690 9972 (Phone)
HOME PAGE: http://cashflow88.com/decisiones/decisiones.html
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