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
Date Written: September 1, 2007
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: Suggested Citation