Adjustment of the Standard WACC Method to Subsidized Loans: A Clarification

Estudios de Economia Aplicada, Vol. 25, No. 1, 2007

Posted: 8 Dec 2009

See all articles by Denis Babusiaux

Denis Babusiaux

Institut Francais du Petrole (IFP)

Axel Pierru

King Abdullah Petroleum Studies and Research Center (KAPSARC)

Date Written: December 7, 2009

Abstract

In this article, we show how to value projects financed by subsidized loans using the standard WACC method, with three distinct assumptions concerning the debt ratio targeted by the firm. In fact, the subsidized loan amount used to calculate this debt ratio can be determined according to book value, economic value or market value. This three definitions are equivalent when considering a non-subsidized loan. In each case, the value of a subsidized loan is determined with the help of a general dynamic non-linear model for the selection of projects with the option of subsidized financing. As a result, when considering economic value, we find the adjustment advocated by Myers (1974) in his Adjusted Present Value approach.

Keywords: WACC, subsidized loan, subsidy, project valuation, capital budgeting

JEL Classification: G30, G31, G32

Suggested Citation

Babusiaux, Denis and Pierru, Axel, Adjustment of the Standard WACC Method to Subsidized Loans: A Clarification (December 7, 2009). Estudios de Economia Aplicada, Vol. 25, No. 1, 2007, Available at SSRN: https://ssrn.com/abstract=1519810

Denis Babusiaux (Contact Author)

Institut Francais du Petrole (IFP) ( email )

228 Avenue Napoleon Bonaparte
Rueil Malmaison 92852
France
33147526280 (Phone)
33147527066 (Fax)

Axel Pierru

King Abdullah Petroleum Studies and Research Center (KAPSARC) ( email )

Riyadh, Central Province
Saudi Arabia

HOME PAGE: http://www.kapsarc.org/

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
552
PlumX Metrics