We claim that in a world without leverage cost the relationship between the levered beta (β L ) and the unlevered beta (βu) of a company depends upon the financing strategy. For a company that maintains a fixed book-value leverage ratio, the relationship is Fernández (2004): β L = βu + (βu - βd) D (1 - T) / E. For a company that maintains a fixed market-value leverage ratio, the relationship is Miles and Ezzell (1980): β L = βu + (D / E) (βu - βd) [1 - T Kd / (1 + Kd)]. For a company with a preset debt in every period, the relationship is Modigliani and Miller (1963): β L = βu + [βu - βd] (D-VTS) / E, where the Value of Tax Shields (VTS) is the present value of the future tax shields discounted at the cost of debt. We also analyze alternative valuation theories proposed in the literature to estimate the relationship between the levered beta and the unlevered beta (Harris and Pringle (1985), Damodaran (1994), Myers (1974), and practitioners) and prove that all provide inconsistent results.
Added: April, 16th 2010
File size: 177.94kb
Tags: unlevered beta, levered beta, asset beta, value of tax shields, required return to equity, leverage cost
Quadratic Equation is a polynomial equation of second degree. The general form of a quadratic equations is ax2+bx+c = 0.
The contributions of the ancient Indian Mathematicians to quadratic equations ...
China is still a very important supplier of pinene for the world, and a large quantity of pinene is exported annually while little pinene is imported. In this report, the detailed export situation of ...