scholarly journals Tax Code Revision and The Value of Tax-Deductible Debt

1970 ◽  
Vol 14 (1) ◽  
pp. 19-31
Author(s):  
William Randolph
Keyword(s):  
Cost Of Capital ◽  
Weighted Average ◽  
Competitive Environment ◽  
Tax Revenue ◽  
Present Value ◽  
Corporate Tax ◽  
Tax Shield ◽  
Maximum Value ◽  
Interest Expense ◽  
Theoretical Amount

This paper examines a tax policy change that would eliminate the interest expense as a tax-deductible item for businesses. We analyze this change using a tax revenue neutral setting in a Modigliani-Miller world. The analysis uses two scenarios to compare the change to the present U.S. Tax Code. Scenario one assumes a non-competitive environment with sticky prices. Scenario two assumes that companies or industries with low leverage would cut prices instead of realizing excess profits. The reduction in prices will redistribute the present value of the corporate tax shield from the stockholder to the consumer. Using the Modigliani-Miller methodology for valuation, the maximum value (equivalent to theoretical value in this case) of the tax shield is approximately $712 billion. The actual value is probably less than half the theoretical amount. Under either scenario, the weighted average cost of capital increases for levered firms.

scholarly journals Decision Making for Project Appraisal in Uncertain Environments: A Fuzzy-Possibilistic Approach of the Expanded NPV Method

Symmetry ◽  
2020 ◽  
Vol 13 (1) ◽  
pp. 27
Author(s):  
Konstantinos A. Chrysafis ◽  
Basil K. Papadopoulos
Keyword(s):  
Net Present Value ◽  
Fuzzy Numbers ◽  
Cost Of Capital ◽  
Weighted Average ◽  
Present Value ◽  
Major Drawback ◽  
Project Appraisal ◽  
Equity Cost ◽  
Set Up ◽  
Intelligent Methods

The major drawback of the classic approaches for project appraisal is the lack of the possibility to handle change requests during the project’s life cycle. This fact incorporates the concept of uncertainty in the estimation of this investment’s worth. To resolve this issue, the authors use fuzzy numbers, possibilistic moments of fuzzy numbers and the hybrid (fuzzy statistic) fuzzy estimators’ method in order to introduce a fuzzy possibilistic version of the expanded net present value method (FPeNPV). This approach consists of two factors: the fuzzy possibilistic NPV and the fuzzy option premium. For the estimation of the fuzzy NPV, some basic assumptions are taken into consideration: (1) the opportunity cost of capital, used as the present value interest factor calculated through the weighted average cost of capital (WACC), (2) the equity cost, determined through the possibilistic set-up of the capital asset pricing model CAPM, and (3) the inflation factor, also included in the estimation of the NPV. The fuzzy estimators’ method is used for the computation of the fuzzy option premium. An algorithm of nine major steps leads to the computation of the FPeNPV. This gives the administration the opportunity to adapt to potential changes in the company’s internal and external environments. In this way, the symmetry between the planning and execution phase of a project can be reinstated. The results validate the statement that fuzzy and intelligent methods remain valuable tools to express uncertainty in various scientific areas. Finally, an illustrative example aims at a thorough comprehension of this new approach of the expanded NPV method.

A New Approach to Capital Budgeting in Closely-Held Firms and Small Firms

1981 ◽  
Vol 5 (4) ◽  
pp. 30-35 ◽  
Author(s):  
Thomas H. McInish ◽  
Ronald J. Kudla
Keyword(s):  
Small Firms ◽  
Net Present Value ◽  
Cost Of Capital ◽  
Weighted Average ◽  
Capital Budgeting ◽  
Cash Flows ◽  
Separation Principle ◽  
Discount Rates ◽  
Present Value ◽  
Investor Returns

The traditional application of the net present value method in capital budgeting involves the use of market derived discount rates such as the cost of capital. Justification of these discount rates stems from the separation principle that states that investment decisions can be made independent of shareholders' tastes and preferences. The purpose of this paper is to show that the separation principle does not hold for closely-held firms and small firms, and, accordingly, market-derived discount rates are inappropriate. Two capital budgeting techniques which are appropriate for these firms are presented. Accept/reject decisions for capital budgeting projects are often made using a technique known as “net present value” (NPV).1 Using the NPV method, acceptable projects are those for which the project's cost is less than the present value of the project's cash flows discounted at the firm's cost of capital; in other words, acceptable projects have a positive NPV. The firm's cost of capital is usually taken to be the weighted average of the firm's cost of equity and debt as measured by investor returns in the capital markets. Justification for use of a discount rate, determined by reference to market-wide investor returns, is based on “the separation principle” which asserts that corporations can make capital budgeting decisions independently of their shareholders' views.2 But because a critical assumption of the separation principle is that shares are readily marketable, it is likely that the separation principle and, hence, market-determined discount rates are inappropriate for closely-held firms and small firms.3 In this paper, we discuss two capital budgeting approaches which are applicable to firms whose shares are not readily marketable. This paper is divided into five sections. First, we discuss the traditional net present value approach to capital budgeting and, then, we indicate in detail, why it may not be suitable for use by closely-held firms and small firms. In the third and fourth sections, we explain two capital budgeting techniques which may be appropriate for use by these firms. Finally, we summarize our conclusions.

scholarly journals Pengembangan Model Fuzzy Project Evaluation Untuk Analisis Kelayakan Finansial Pendirian Pabrik Baru

2015 ◽  
Vol 1 (1) ◽  
pp. 22
Author(s):  
Yuniar Farida
Keyword(s):  
Discount Rate ◽  
Fuzzy Number ◽  
Average Cost ◽  
Net Present Value ◽  
Cost Of Capital ◽  
Weighted Average ◽  
Project Evaluation ◽  
Triangular Fuzzy Number ◽  
Present Value

Untuk rencana pembangunan suatu pabrik baru, aspek finansial merupakan aspek terpenting dalam evaluasi kelayakannya. Dikatakan demikian, karena sekalipun aspek lain tergolong layak, jika studi aspek finansial memberikan hasil yang tidak layak, maka usulan proyek akan ditolak karena tidak memberikan manfaat ekonomi. Dalam penelitian ini Net Present Value (NPV) digunakan sebagai metode evaluasi kelayakan finansial rencana pendirian pabrik PT. X. Dalam perhitungan NPV, salah satu faktor yang krusial adalah tarif diskonto atau discount rate yang berlaku pada masa pengembalian investasi suatu proyek. NPV suatu proyek harus dihitung dengan discount rate konstan sampai masa pengembalian investasi, meski pada kenyataannya faktor – faktor yang mempengaruhi discount rate setiap tahun tidak selalu sama, akibatnya nilai NPV menjadi samar (fuzzy). Untuk mengatasi hal tersebut, maka dilakukan suatu pemodelan untuk mendekati nilai discount rate yang tepat. Dalam penelitian ini discount rate dihitung berdasarkan nilai WACC (Weighted Average Cost of Capital) yang merupakan gabungan dari struktur modal, yaitu hutang dan ekuitas. Untuk memperoleh nilai WACC yang tepat, dilakukan pendekatan dengan menggunakan Triangular Fuzzy Number (TFN). Adapun penggunaan fuzzy dilakukan karena WACC mengandung unsur ketidakpastian yang tinggi, yang bisa membuat perhitungan WACC dengan metode konvensional menjadi samar/kabur. Dari hasil perhitungan menggunakan TFN, diperoleh nilai WACC sebesar 13.64 % dan menghasilkan NPV sebesar 6,430,464,000,000. Sedangkan nilai WACC deterministik yang dihasilkan evaluator sebesar 13.72 % dan menghasilkan NPV sebesar 6,358,310,540,000

scholarly journals Tax Code Change Impacts on the Practice of Corporate Finance

2020 ◽  
Vol 5 (3) ◽  
pp. p21
Author(s):  
Rakesh Duggal ◽  
Michael C. Budden
Keyword(s):  
Corporate Finance ◽  
Capital Budgeting ◽  
Public Law ◽  
Corporate Tax ◽  
Tax Rate ◽  
Tax Shield ◽  
Code Change ◽  
Financial Decision ◽  
Jobs Act ◽  
Interest Expense

Public Law No. 115-97 (initially introduced in the house as the Tax Cuts and Jobs Act or TCJA) passed by Congress in 2017 has significantly revised the Internal Revenue Code of 1986. Since taxes play an important role in financial decision-making, the TCJA will impact decisions in many areas of corporate finance, including capital structure and capital budgeting. By using S&P 500 data, this paper attempts to broadly estimate these impacts. The lower corporate tax rate under the new law reduces the corporate incentive to borrow to benefit from the interest expense tax shield. The lower tax rate also reduces the depreciation tax shield and marginally raises the average cost of capital. However, an S&P 500 firm on average will receive an estimated $239 million per year in tax-related benefits, based on 2017 financial data. This annual benefit will decrease after five years as the 100% expensing of investments is gradually withdrawn after 2023.

scholarly journals Analisis Kelayakan Pengembangan Proyek Apartemen Citralake Suites - Citra Garden City

2020 ◽  
Vol 4 (2) ◽  
pp. 16
Author(s):  
Noor Achyar Sulthoni ◽  
Anas Lutfi
Keyword(s):  
Cost Of Capital ◽  
Investment Decision ◽  
Weighted Average ◽  
Internal Rate Of Return ◽  
Calculation Methods ◽  
Present Value ◽  
Value Analysis ◽  
Alternative Funding ◽  
Cash Inflow ◽  
The Cost

The population density in the capital has increased from year to years, this situation used by PT CD as a business tool in the property sector. A kind of research is needed to find out whether the development of this land is profitable or not, by conducting a Business Feasibility Analysis. Investment decision analysis is done by using 3 (three) main calculation methods. From the results of research conducted by the author, it is obtained as follows in :In the payback period, sales are up to 2018, reaching 60%, so this project is feasible to be acceptedNet Present Value Analysis, From the results of calculations, NPV cash inflow is still far greater than the NPV cash outflow means that according to the NPV assessment that this project is considered very feasible to be carried outThe Internal Rate of Return (IRR) is a feasible project because the IRR is a normal and optimistic alternative. greater than the Weighted average cost of capital (WACC)Based on the results of the analysis and calculations carried out by the author in relation to project, the general investment investment is considered very feasible and beneficial not only to the developer but also consumers who buy apartment units on the project. Paying attention to what has been analyzed and discussed, the author's suggestion is to re-check cashflow by considering finding alternative funding with an improved loan. so that the cost of capital is small and profits increase.

scholarly journals The weighted average cost of capital over the lifecycle of the firm: Is the overinvestment problem of mature firms intensified by a higher WACC?

2016 ◽  
Vol 12 (2) ◽  
pp. 96-103 ◽  
Author(s):  
Carlos S. Garcia ◽  
Jimmy Agustin Saravia Matus ◽  
David A. Yepes
Keyword(s):  
Corporate Governance ◽  
Literature Review ◽  
Average Cost ◽  
Net Present Value ◽  
Cost Of Capital ◽  
Good Reason ◽  
Weighted Average ◽  
Present Value

Firm lifecycle theory predicts that the Weighted Average Cost of Capital (WACC) will tend to fall over the lifecycle of the firm (Mueller, 2003, p. 80-81). However, given that previous research finds that corporate governance deteriorates as firms get older (Mueller and Yun, 1998; Saravia, 2014) there is good reason to suspect that the opposite could be the case, that is, that the WACC is higher for older firms. Since our literature review indicates that no direct tests to clarify this question have been carried out up till now, this paper aims to fill the gap by testing this prediction empirically. Our findings support the proposition that the WACC of younger firms is higher than that of mature firms. Thus, we find that the mature firm overinvestment problem is not intensified by a higher cost of capital, on the contrary, our results suggest that mature firms manage to invest in negative net present value projects even though they have access to cheaper capital. This finding sheds new light on the magnitude of the corporate governance problems found in mature firms.

LA FUSIÓN CARULLA-VIVERO, ¿CREÓ VALOR?

2014 ◽  
Vol 5 (10) ◽  
pp. 93
Author(s):  
Andrés Villegas Cortés ◽  
Luz Ángela Rojas La Rota
Keyword(s):  
Average Cost ◽  
Cost Of Capital ◽  
Economic Value ◽  
Weighted Average ◽  
Value Added ◽  
Economic Value Added ◽  
Estudio De Caso

El presente trabajo busca determinar si la fusión de las empresas Carulla-Vivero ocurrida en el año 2000 generó valor. Para esto, se estudia el conceptode valor, posteriormente se explica el estudio de caso como metodología deinvestigación para concluir con la exposición del caso mismo de la fusión, ysu resultado. Una vez realizado el análisis de las dos empresas, se hace unacomparación y una valoración por dos metodologías ampliamente aceptadas:los métodos Economic Value Added (EVA) - Weighted Average Cost of Capital(WACC) y Flujo de Caja Histórico, con lo cual se explora en su interior la fusióny se explican los resultados obtenidos en ella. Finalmente, se hace una seriede observaciones, conclusiones y recomendaciones sobre la fusión, asícomo de la metodología del estudio de caso, para el abordaje de temas de laadministración.

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