IDEAS home Printed from https://ideas.repec.org/a/taf/ufajxx/v52y1996i4p42-50.html
   My bibliography  Save this article

Valuation of Highly Leveraged Firms

Author

Listed:
  • Enrique R. Arzac

Abstract

The financial policy highly leveraged firms (HLFs) commonly follow implies uncertain leverage. Explicit allowance for this characteristic leads to two complementary pricing models. A recursive formula for the value of HLF follows from applying the adjusted present value (APV) approach to uncertain tax shields. This formula is used to evaluate the robustness of the simple APV rule and other valuation approaches used in practice. The HLF equity is also modeled as a call option with uncertain exercise price, which provides a natural way of dealing with uncertain leverage and complements the APV approach. Both models require inputs that are usually observable. The models developed in this article apply to the valuation of firms undergoing financial restructuring, as well as to leveraged buyouts and project financing. In all these situations, firms deploy all or a significant portion of their free cash flow to debt reduction and their leverage ratio is uncertain.

Suggested Citation

  • Enrique R. Arzac, 1996. "Valuation of Highly Leveraged Firms," Financial Analysts Journal, Taylor & Francis Journals, vol. 52(4), pages 42-50, July.
    • Handle: RePEc:taf:ufajxx:v:52:y:1996:i:4:p:42-50
    DOI: 10.2469/faj.v52.n4.2010
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.2469/faj.v52.n4.2010
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.2469/faj.v52.n4.2010?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.

    More about this item

    Statistics

    Access and download statistics

    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:taf:ufajxx:v:52:y:1996:i:4:p:42-50. 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.

    We have no bibliographic references for this item. You can help adding them by using 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: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/ufaj20 .

    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.