Consistent Valuation in the Two-Period Case: A Pedagogical Note (Dinh Gia Thong Nhat Trong Truong Hop Hai Giai Doan: Bai Viet Giang Day) (Vietnamese Version)

Financial Project Appraisals Working Paper No. 006-2003

10 Pages Posted: 8 Sep 2003

See all articles by Joseph Tham

Joseph Tham

Educational Independent Consultant

Tran Viet Thang

SAIGON COMMERCIAL BANK (SCB); affiliation not provided to SSRN

Date Written: August 20, 2003

Abstract

It is widely accepted that the correct discount rate for the tax shield depends on whether the value of the debt is a fixed amount or is a proportion of the value of the firm.

In this pedagogical note, using a simple two period numerical example, I assume a fixed amount of debt and demonstrate that if the cost of debt is used to discount the tax shield to determine the value of the levered firm, arbitrage opportunities exist.

I propose that it is always correct to use the return on unlevered equity, to discount the tax shield. Consequently, the correct discount rate for the tax shield does not depend on whether the value of the debt is a fixed amount or is a proportion of the value of the firm. It is not difficult to extend the analysis to the multiperiod case. Happily, all the inconsistencies are resolved if the return on unlevered equity, is used to discount the tax shield.

Note: Downloadable document is in Vietnamese. The English version is available to download at: http://ssrn.com/abstract=234997

Keywords: capital budgeting

JEL Classification: G31

Suggested Citation

Tham, Joseph and Thang, Tran Viet and Thang, Tran Viet, Consistent Valuation in the Two-Period Case: A Pedagogical Note (Dinh Gia Thong Nhat Trong Truong Hop Hai Giai Doan: Bai Viet Giang Day) (Vietnamese Version) (August 20, 2003). Financial Project Appraisals Working Paper No. 006-2003, Available at SSRN: https://ssrn.com/abstract=437003 or http://dx.doi.org/10.2139/ssrn.437003

Joseph Tham (Contact Author)

Educational Independent Consultant ( email )

Tran Viet Thang

SAIGON COMMERCIAL BANK (SCB) ( email )

4- HO XUAN HUONG
Hanoi, 10000
Vietnam
084-04-9438732 (Phone)
084-04-9438734 (Fax)

affiliation not provided to SSRN

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