Modeling Cash Flows with Constant Leverage: A Note

Joseph Tham () and Ignacio Velez-Pareja ()

No 1897, Proyecciones Financieras y Valoración from Master Consultores

Abstract: Abstract: It is widely known that if the leverage is constant over time, then the after-tax Weighted Average Cost of Capital (WACC) is constant over time. In other words, it is inappropriate to use a constant after-tax WACC to discount the free cash flow (FCF) if the leverage changes over time. However, it is common to find analysts who inconsistently use a constant after-tax WACC even if the leverage is not constant. In this teaching note, we use a simple numerical example to illustrate how to model cash flows that are consistent with constant leverage. We verify the consistency of the example with two basic principles: conservation of cash flows and conservation of values.

Keywords: WACC (search for similar items in EconPapers)
JEL-codes: D61 (search for similar items in EconPapers)
Pages: 9
Date: 2005-06-28
References: Add references at CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:col:000463:001897

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