A New Approach to Wacc, Value of Tax Savings and Value for Growing and Non Growing Perpetuities: A Clarification

37 Pages Posted: 10 Jan 2006

See all articles by Ignacio Velez-Pareja

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation

Date Written: January 27, 2006

Abstract

In this note we correct the findings reported by Vélez-Pareja and Tham (2005).

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 a 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, which is the value of the perpetuity.

We compare the typical textbook proposals for calculating the value of a perpetuity and we found that there are significant deviations. We compare with the Miller and Modigliani (1961) plowback proposal adopted by Copeland et al. (2000).

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, A New Approach to Wacc, Value of Tax Savings and Value for Growing and Non Growing Perpetuities: A Clarification (January 27, 2006). Available at SSRN: https://ssrn.com/abstract=873686 or http://dx.doi.org/10.2139/ssrn.873686

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

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