Interpreting accruals as working capital investment, we hypothesize that firms rationally adjust their investment to respond to discount rate changes. Consistent with the optimal investment hypothesis, we document that (i) the predictive power of accruals for future stock returns increases with...

Practitioners and some academics use potential dividends rather than actual payments to shareholders for valuing a firm’s equity. We underline the differences between the two methods and present some arguments supporting the thesis that firm valuation with potential dividends overstate the...

This paper shows a formulation for the cost of equity and the WACC for growing perpetuities. Some authors have derived the general expressions for those formulas but not specifically for perpetuities with constant growth. The result obtained is that a previously general formulation for a finite...

In this article we use a real life case from an emerging country to illustrate the valuation with discounted cash flow methods, witch include complexities such as unpaid taxes, losses carried forward, foreign exchange debt, presumptive income and inflation adjustments to the Financial...

This article presents a formal derivation of general expressions for cost of equity (Ke) and weighted average cost of capital (WACC) in perpetuities with constant growth, which do not make any assumption on what the proper discount rate is to be applied to the firm's tax shield. The formulas are...

There is a lot of confusion among practitioners about valuing firms and investment projects. At the first sight, the discounting procedure is a simple and routine task which does not involve much effort. But actually even in simple cases accurate valuation requires attention to plenty of...

This paper presents a new way of valuing firms and measuring residual income. The method, originally introduced in Magni (2000a, 2000b, 2000c, 2001), is here renamed lost-capital paradigm. In order to enhance comprehension the presentation relies on a very simple numerical example which shows...

I present a set of conditions for defining risky debt associated to cash flow and not to accounting earnings. I explain why realization of tax shields for finite cash flows in any period of time t are correlated to Earnings before Interest and Taxes and are not correlated to interest expenses at...

In these slides we discuss the practical and conceptual difficulty of finding an Optimal Capital Structure. We propose a normative approach we call Implicit Bankruptcy Costs Theory and how to proceed to find the optimal capital structure and value with period-to-period constant and variable...