The Non-Conventional Wacc with Risky Debt and Risky Tax Shield (Wacc Dac Biet Doi Voi No Co Rui Ro Va La Chan Thue Co Rui Ro) (Vietnamese Version)

Financial Project Appraisals Working Paper No. 003-2003

20 Pages Posted: 31 Jul 2003

See all articles by Tran Viet Thang

Tran Viet Thang

SAIGON COMMERCIAL BANK (SCB); affiliation not provided to SSRN

Joseph Tham

Educational Independent Consultant

Nicholas X. Wonder

Western Washington University - College of Business & Economics

Date Written: June 30, 2003

Abstract

In the traditional formulation of the WACC, the debt and the tax shield are risk-free. However, even though the debt is risk-free, the tax shield can be risky. Furthermore, both the debt and the tax shield can be risky. In this paper, we present the non-conventional weighted everage cost of capital (WACC) for the single period binomial process with risky debt and risky tax shield, and derive the relevant formulas for the returns to the levered equity holder and the debt holder.

Risk-free debt does not imply that the tax shield is risk-free. Unlike the traditional formulation, with the non-conventional WACC, the discount rate for the tax shield is not be restricted to two values, the risk-free rate rf and the return to unlevered equity rho. We make no prior assumption about the value of the discount rate for the tax shield psi. The value of psi depends on the riskiness of the tax shield. If the tax shield is risk-free, then the value of psi is equal to risk-free rate rf. If the tax shield is risky, the the value of psi is simply higher than the risk-free rate rf. In particular, if the payoff structure of the tax shield is the same as the payoff structure for the levered equity holder, the value of psi is equal to the return to the levered equity holder.

In Section One, we present the non-conventional WACC for the single period with the capital cash flow (CCF) rather than the free cash flow (FCF) and examine the traditional position, where both the debt and the tax shield are risk-free. In Section Two, we assume that both the debt and the tax shield are risky.

Note: The downloadable document is in Vietnamese. The English version is available at http://ssrn.com/abstract=292959

Keywords: Cost-Benefit Analysis, Capital Budgeting, Project evaluation

JEL Classification: D61, G31, H43

Suggested Citation

Thang, Tran Viet and Thang, Tran Viet and Tham, Joseph and Wonder, Nicholas X., The Non-Conventional Wacc with Risky Debt and Risky Tax Shield (Wacc Dac Biet Doi Voi No Co Rui Ro Va La Chan Thue Co Rui Ro) (Vietnamese Version) (June 30, 2003). Financial Project Appraisals Working Paper No. 003-2003, Available at SSRN: https://ssrn.com/abstract=420860 or http://dx.doi.org/10.2139/ssrn.420860

Tran Viet Thang

SAIGON COMMERCIAL BANK (SCB) ( email )

4- HO XUAN HUONG
Hanoi, 10000
Vietnam
084-04-9438732 (Phone)
084-04-9438734 (Fax)

affiliation not provided to SSRN

Joseph Tham

Educational Independent Consultant ( email )

Nicholas X. Wonder (Contact Author)

Western Washington University - College of Business & Economics ( email )

Department of Finance and Marketing
Bellingham, WA 98225-9071

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