Download this Paper Open PDF in Browser

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

Felipe Mejia-Pelaez

Octum

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation

Date Written: July 31, 2010

Abstract

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

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: https://ssrn.com/abstract=1651662

Felipe Mejia-Pelaez (Contact Author)

Octum ( email )

Carrera 35A 5A-170
Apt 1201 - Edificio Catay 8
Medellín, Antioquia
Colombia

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

Paper statistics

Downloads
358
Rank
68,424
Abstract Views
2,291