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

See all articles by Ignacio Velez-Pareja

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation

Joseph Tham

Duke University - Duke Center for International Development in the Sanford School of Public Policy; Academy of Public Administration under the President of the Republic of Kazakhstan

Date Written: October 11, 2007

Abstract

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

Velez-Pareja, Ignacio and Tham, Joseph, Wacc, Value of Tax Savings and Terminal Value for Growing and Non Growing Perpetuities (October 11, 2007). Available at SSRN: https://ssrn.com/abstract=789025 or http://dx.doi.org/10.2139/ssrn.789025

Ignacio Velez-Pareja (Contact Author)

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

Joseph Tham

Duke University - Duke Center for International Development in the Sanford School of Public Policy ( email )

Box 90312
302, Towerview Dr, Rubenstein Hall, Room 272
Durham, NC 27708
United States
919-613-9234 (Phone)
919-681-0831 (Fax)

HOME PAGE: http://fds.duke.edu/db/Sanford/faculty/thamjx

Academy of Public Administration under the President of the Republic of Kazakhstan ( email )

Abay Street, 33a
Astana
Kazakhstan
+7 8 7172753422 (Phone)

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