EconPapers    
Economics at your fingertips  
 

Consistent valuation of project finance and LBOs using the flows†to†equity method

Ian A. Cooper and Kjell Nyborg ()

European Financial Management, 2018, vol. 24, issue 1, 34-52

Abstract: 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.

Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
https://doi.org/10.1111/eufm.12136

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:eufman:v:24:y:2018:i:1:p:34-52

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=1354-7798

Access Statistics for this article

European Financial Management is currently edited by John Doukas

More articles in European Financial Management from European Financial Management Association Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().

 
Page updated 2019-07-28
Handle: RePEc:bla:eufman:v:24:y:2018:i:1:p:34-52