IDEAS home Printed from https://ideas.repec.org/a/spr/jbecon/v92y2022i7d10.1007_s11573-022-01094-9.html
   My bibliography  Save this article

Terminal value calculation with discontinuous financing and debt categories

Author

Listed:
  • Stefan Dierkes

    (Georg-August-University-Göttingen)

  • Imke Maeyer

    (Georg-August-University-Göttingen)

Abstract

Empirical analyses indicate that active and passive debt management have limited power to explain the financing behavior of firms. Therefore, discontinuous financing, as a combination of active and passive debt management, might be a more realistic financing strategy. However, the properties of this financing strategy for the steady state have not yet been sufficiently analyzed. For this reason, we investigate analytically terminal value calculation with discontinuous financing and derive adjustment formulas for the period-specific levered cost of equity. Since a single adjustment of the entire debt at the beginning of every planning phase might still not be close to the real financing behavior of firms, we modify discontinuous financing by introducing debt categories, which are adjusted successively and include the maturity of debt. For this new financing strategy, we derive valuation equations and an adjustment formula for the constant cost of equity. Finally, we discuss the relevance and applicability of discontinuous financing with debt categories and its impact on the market value of a firm.

Suggested Citation

  • Stefan Dierkes & Imke Maeyer, 2022. "Terminal value calculation with discontinuous financing and debt categories," Journal of Business Economics, Springer, vol. 92(7), pages 1207-1248, September.
    • Handle: RePEc:spr:jbecon:v:92:y:2022:i:7:d:10.1007_s11573-022-01094-9
    DOI: 10.1007/s11573-022-01094-9
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11573-022-01094-9
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s11573-022-01094-9?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Rainer Baule, 2019. "The cost of debt capital revisited," Business Research, Springer;German Academic Association for Business Research, vol. 12(2), pages 721-753, December.
    2. Myron J. Gordon & Eli Shapiro, 1956. "Capital Equipment Analysis: The Required Rate of Profit," Management Science, INFORMS, vol. 3(1), pages 102-110, October.
    3. Heitor Almeida & Thomas Philippon, 2007. "The Risk‐Adjusted Cost of Financial Distress," Journal of Finance, American Finance Association, vol. 62(6), pages 2557-2586, December.
    4. Mark T. Leary & Michael R. Roberts, 2005. "Do Firms Rebalance Their Capital Structures?," Journal of Finance, American Finance Association, vol. 60(6), pages 2575-2619, December.
    5. Stefan Dierkes & Imke de Maeyer, 2020. "Valuation with mixed financing strategies," Business Research, Springer;German Academic Association for Business Research, vol. 13(3), pages 1317-1341, November.
    6. Stefan Dierkes & Ulrich Schäfer, 2017. "Corporate taxes, capital structure, and valuation: Combining Modigliani/Miller and Miles/Ezzell," Review of Quantitative Finance and Accounting, Springer, vol. 48(2), pages 363-383, February.
    7. Isik Inselbag & Howard Kaufold, 1997. "Two Dcf Approaches For Valuing Companies Under Alternative Financing Strategies (And How To Choose Between Them)," Journal of Applied Corporate Finance, Morgan Stanley, vol. 10(1), pages 114-122, March.
    8. Sven Arnold & Alexander Lahmann & Bernhard Schwetzler, 2018. "Discontinuous financing based on market values and the value of tax shields," Business Research, Springer;German Academic Association for Business Research, vol. 11(1), pages 149-171, February.
    9. Grinblatt, Mark & Liu, Jun, 2008. "Debt policy, corporate taxes, and discount rates," Journal of Economic Theory, Elsevier, vol. 141(1), pages 225-254, July.
    10. Ashton, D J & Atkins, D R, 1978. "Interactions in Corporate Financing and Investment Decisions-Implications for Capital Budgeting: A Further Comment," Journal of Finance, American Finance Association, vol. 33(5), pages 1447-1453, December.
    11. Huang, Rongbing & Ritter, Jay R., 2009. "Testing Theories of Capital Structure and Estimating the Speed of Adjustment," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(2), pages 237-271, April.
    12. Eugene F. Fama, 2002. "Testing Trade-Off and Pecking Order Predictions About Dividends and Debt," The Review of Financial Studies, Society for Financial Studies, vol. 15(1), pages 1-33, March.
    13. Marko Volker Krause & Alexander Lahmann, 2016. "Reconsidering the appropriate discount rate for tax shield valuation," Journal of Business Economics, Springer, vol. 86(5), pages 477-512, July.
    14. Miles, James A. & Ezzell, John R., 1980. "The Weighted Average Cost of Capital, Perfect Capital Markets, and Project Life: A Clarification," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 15(3), pages 719-730, September.
    15. Miles, James A & Ezzell, John R, 1985. "Reformulating Tax Shield Valuation: A Note," Journal of Finance, American Finance Association, vol. 40(5), pages 1485-1492, December.
    16. Gordon A. Sick, 1990. "Tax-Adjusted Discount Rates," Management Science, INFORMS, vol. 36(12), pages 1432-1450, December.
    17. Michael J. Barclay & Clifford W. Smith, 2005. "The Capital Structure Puzzle: The Evidence Revisited," Journal of Applied Corporate Finance, Morgan Stanley, vol. 17(1), pages 8-17, January.
    18. Lewellen, Wilbur G. & Emery, Douglas R., 1986. "Corporate Debt Management and the Value of the Firm," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(4), pages 415-426, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Stefan Dierkes & Imke de Maeyer, 2020. "Valuation with mixed financing strategies," Business Research, Springer;German Academic Association for Business Research, vol. 13(3), pages 1317-1341, November.
    2. Ralf Diedrich & Stefan Dierkes & Hans-Christian Gröger, 2022. "A note on the cost of capital with fixed payout ratios," Review of Quantitative Finance and Accounting, Springer, vol. 59(4), pages 1559-1575, November.
    3. Sven Arnold & Alexander Lahmann & Bernhard Schwetzler, 2018. "Discontinuous financing based on market values and the value of tax shields," Business Research, Springer;German Academic Association for Business Research, vol. 11(1), pages 149-171, February.
    4. Stefan Dierkes & Ulrich Schäfer, 2017. "Corporate taxes, capital structure, and valuation: Combining Modigliani/Miller and Miles/Ezzell," Review of Quantitative Finance and Accounting, Springer, vol. 48(2), pages 363-383, February.
    5. Fernandez, Pablo, 2005. "Financial literature about discounted cash flow valuation," IESE Research Papers D/606, IESE Business School.
    6. Alexander Lahmann & Maximilian Schreiter & Bernhard Schwetzler, 2018. "Der Einfluss von Insolvenz, Kapitalstruktur und Fremdkapitalfälligkeit auf den Unternehmenswert [The Impact of Default Risk, Capital Structure, and Debt Maturity on Firm Value]," Schmalenbach Journal of Business Research, Springer, vol. 70(1), pages 73-123, March.
    7. Fischer, Max & Krause, Marko & Lahmann, Alexander & Stimper, Franziska, 2022. "Firm valuation with state dependent COD taxation," The Quarterly Review of Economics and Finance, Elsevier, vol. 84(C), pages 550-561.
    8. Barclay, Michael J. & Fu, Fangjian & Smith, Clifford W., 2021. "Seasoned equity offerings and corporate financial management," Journal of Corporate Finance, Elsevier, vol. 66(C).
    9. Giorgio Canarella & Stephen M. Miller, 2019. "Determinants of Optimal Capital Structure and Speed of Adjustment: Evidence from the U.S. ICT Sector," Working papers 2019-06, University of Connecticut, Department of Economics.
    10. Sabiwalsky, Ralf, 2010. "Nonlinear modelling of target leverage with latent determinant variables -- new evidence on the trade-off theory," Review of Financial Economics, Elsevier, vol. 19(4), pages 137-150, October.
    11. Valentin Haag & Christian Koziol, 2023. "Company Cost of Capital and Leverage: A Simplified Textbook Relationship Revisited," Schmalenbach Journal of Business Research, Springer, vol. 75(1), pages 37-69, March.
    12. Fernandez, Pablo, 2004. "The value of tax shields is NOT equal to the present value of tax shields," Journal of Financial Economics, Elsevier, vol. 73(1), pages 145-165, July.
    13. Fangjian Fu & Clifford W. Smith, 2021. "Strategic Financial Management: Lessons from Seasoned Equity Offerings," Journal of Applied Corporate Finance, Morgan Stanley, vol. 33(1), pages 22-35, March.
    14. Biswajit Ghose & Kailash Chandra Kabra, 2019. "Capital Structure Dynamics and Financing Imbalance: Evidence from an Emerging Economy," Emerging Economy Studies, International Management Institute, vol. 5(2), pages 103-124, November.
    15. Krause, Marko & Lahmann, Alexander, 2017. "Valuation effects of taxes on debt cancellation," The Quarterly Review of Economics and Finance, Elsevier, vol. 65(C), pages 346-354.
    16. Andreas Schüler, 2021. "Cross-border DCF valuation: discounting cash flows in foreign currency," Journal of Business Economics, Springer, vol. 91(5), pages 617-654, July.
    17. Fernández, Pablo, 1995. "Equivalence of the APV, WACC and flows to equity approaches to firm valuation," IESE Research Papers D/292, IESE Business School.
    18. Fernandez, Pablo, 2007. "A more realistic valuation: APV and WACC with constant book leverage ratio," IESE Research Papers D/715, IESE Business School.
    19. Ogden, Joseph P. & Wu, Shanhong, 2013. "Reassessing the effect of growth options on leverage," Journal of Corporate Finance, Elsevier, vol. 23(C), pages 182-195.
    20. Nguyen Kim-Duc & Pham Khanh Nam, 2024. "Consistent valuation: extensions from bankruptcy costs and tax integration with time-varying debt," Review of Quantitative Finance and Accounting, Springer, vol. 62(2), pages 719-754, February.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:jbecon:v:92:y:2022:i:7:d:10.1007_s11573-022-01094-9. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.