Deterministic discounting of risky cash-flows
Carlo Mari and
Journal of Finance and Investment Analysis, 2017, vol. 6, issue 3, 2
A model to value risky cash-flows through discounting at deterministicÂ rates is presented. The analysis mainly concerns with the valuationÂ of projectâ€™s levered cash-flows under default risky debt and general taxÂ shield assumptions. Deterministic unlevered and levered rates as well asÂ a deterministic Weighted Average Cost of Capital (dWACC) are definedÂ and the relevant relationships among them are derived. The model allowsÂ to account for the risk of cash-flows in a proper way and produceÂ exact results as in the stochastic discounting method. To illustrate theÂ model, a numerical example about the evaluation of a two-period investmentÂ project with default risky debt is provided. The proposedÂ approach is general and represents a first step toward a bridge betweenÂ stochastic models for capital budgeting and more traditional capitalÂ budgeting techniques based on discounted cash-flow analysis.Mathematics Subject Classification: G31; G32; G33Keywords: Risky cash-flow; risky debt; tax shield; present value; WACC
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