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Contribution Details
| Type | Journal Article |
| Scope | Discipline-based scholarship |
| Title | Consistent valuation of project finance and LBOs using the flows-to-equity method |
| Organization Unit | |
| Authors |
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| Item Subtype | Original Work |
| Refereed | Yes |
| Status | Published in final form |
| Language |
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| Journal Title | European financial management |
| Publisher | Wiley-Blackwell Publishing, Inc. |
| Geographical Reach | international |
| ISSN | 1354-7798 |
| Volume | 24 |
| Number | 1 |
| Page Range | 34 - 52 |
| Date | 2018 |
| Abstract Text | The flows-to-equity method is used to value transactions where debt amortizes according to a fixed schedule, requiring a formula that links the changing leverage with a time-varying equity discount rate. We show that extant formulas yield incorrect valuations because they are inconsistent with the basic assumptions of this method. The error from using the wrong formula can be large, especially at currently low interest rates. We derive a formula that captures the effects of a fixed debt plan, potentially expensive debt, and costs of financial distress. We resolve an important issue about what to use as the cost of debt. |
| Digital Object Identifier | 10.1111/eufm.12136 |
| Other Identification Number | merlin-id:15331 |
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