Cost of Equity and WACC for Perpetuities with Constant Growth
The Valuation Journal, Vol. 5, No. 2, pp. 89-121, 2010
21 Pages Posted: 1 Aug 2010 Last revised: 24 Jan 2011
Date Written: July 31, 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.
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
Suggested Citation: Suggested Citation