Subsidized Cost of Debt: The Relevance of the Research Question in the Financial Research (La Subvencion Financiera del Coste de la Deuda: La Importancia de la Pregunta en la Investigacion Financiera)

Estrategia Financiera, No. 242, pp. 19-26

16 Pages Posted: 1 Jun 2008 Last revised: 1 Apr 2009

See all articles by Mariano Gonzalez

Mariano Gonzalez

Universidad San Pablo CEU

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation

Ana Mateos

Universidad CEU Cardenal Herrera

Date Written: September 1, 2007

Abstract

The purpose of this work is double. On one side, we wish to examine if subsidizing the cost of debt has some influence on the firm value (debt plus equity) or if it is just a transfer from debt holders to shareholders. On the other hand, we wish to show that research in Finance, as in many others fields of study, requires that the starting hypothesis to be tested, should have a correct formulation. If not, it could fix the ending results and hence they might be subjective.

We can draw two basic conclusions: First that cash flow valuation methods do not consider ll the possible scenarios, hence the posed problem should be considered as an American option of trading off assets in order to arrive to a correct valuation. Second, the question should be, why should we subsidize debt? Because once we know the cause, it is easier to define the effect.

Note: Downloadable document in Spanish.

Keywords: subsidized debt, firm valuation, American option, for trading of assets, case method

JEL Classification: G13, G14, C63

Suggested Citation

Gonzalez, Mariano and Velez-Pareja, Ignacio and Mateos, Ana, Subsidized Cost of Debt: The Relevance of the Research Question in the Financial Research (La Subvencion Financiera del Coste de la Deuda: La Importancia de la Pregunta en la Investigacion Financiera) (September 1, 2007). Estrategia Financiera, No. 242, pp. 19-26. Available at SSRN: https://ssrn.com/abstract=1139343

Mariano Gonzalez (Contact Author)

Universidad San Pablo CEU ( email )

Julian Romea, 23
Madrid, 28003
Spain

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation ( email )

Ave Miramar # 18-93 Apt 6A
Cartagena
Colombia
+573112333074 (Phone)

HOME PAGE: http://cashflow88.com/decisiones/decisiones.html

Ana Mateos

Universidad CEU Cardenal Herrera ( email )

Carmelitas 3
Elche, Alicante 03203
Spain

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