Consistent valuation: extensions from bankruptcy costs and tax integration with time-varying debt

Nguyen Kim-Duc () and Pham Khanh Nam
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Nguyen Kim-Duc: University of Economics Ho Chi Minh City (UEH)
Pham Khanh Nam: University of Economics Ho Chi Minh City (UEH)

Review of Quantitative Finance and Accounting, 2024, vol. 62, issue 2, No 10, 719-754

Abstract: Abstract This study introduces a new version of the adjusted present value (APV) method and ensures its consistent valuation with the cost of capital (CoC) method at the highest level of generalization. The newly developed APV version and equivalent formulae consider stochastic debt and the trade-off between corporate income taxes (CIT) and personal income taxes (PIT), as well as tax benefits and financial distress costs. The value of expected bankruptcy costs aligns with the valuation aspect, enabling practical application of the formulae by valuers. The equivalence also reflects the differing perspectives of tax shields between stockholders and debt holders when PITs are introduced. Ultimately, the results demonstrate that the equivalence in this study aligns with, and can reduce to, previous standard formulae, under their stringent assumptions.

Keywords: Valuation; Cost of capital; CoC; APV; Tax shields; Bankruptcy costs; Personal income tax; G12; G31; G32; G33 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11156-023-01217-5

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