Wacc, Value of Tax Savings and Terminal Value for Growing and Non Growing Perpetuities
41 Pages Posted: 30 Aug 2005 Last revised: 17 Oct 2007
Date Written: October 11, 2007
Although perpetuities are somewhat artificial in the sense that in practice they do not exist, they are relevant because no matter how detailed and complex a forecasted financial plan for a firm or project could be terminal value usually is calculated as perpetuity. This terminal value might be a growing or a non growing perpetuity. On the other hand, usually terminal value is a substantial part of the firm value.
In this note we examine in detail the proper discount rate for cash flows in perpetuity, the present value of tax savings and the calculation of terminal value. The findings contradict what is generally accepted in the literature.
Keywords: WACC, perpetuities, terminal value, tax savings
JEL Classification: D61, G31, H43
Suggested Citation: Suggested Citation