PRE- AND POST-TAX DISCOUNT RATE: BE AWARE!

Readers, this article is pretty good, reminding us that pre-tax and post-tax discount rate is not the same.

Ignacio Velez-Pareja:

I agree with the paper. The reason is simple.  Debt creates value through tax savings. See the cashflows and value equations.
FCF + TS = CFE + CFD
and
V_unlevered + VTS = D + E
If you disregard taxes, you lose VTS
FCF = Free Cash Flows
TS = Cash Flow from Tax Shield
CFE = Cash Flow to/from the Equityholders
CFD = Cash Flow to/from the Debtholders
VTS  = Value of Tax Shield
D = Debt (Book value)
E = Equity (Market value)
Posted in COST OF CAPITAL.

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