nacct - 17 How would the value of the headquarters unit...

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16. Why should rates of discount on cash flows of corporate headquarters differ from those in its business units? Solution: Rate of discount depends upon various factors like inflation, risk involved, certainty, etc. Thus in order to choose the most appropriate rate of discount for the cash flows proper analysis of the cash flows are indispensable so that the cash flows can be discounted at the appropriate rate. Rate of discount on cash flows from head quarter will differ from that of a business unit because the cash flows associated with the head quarter are considered to be more certain as compared to that of a business units this is because the risk involved in the business units are comparatively higher. This is the reason whuy rates of discount on cash flows are used differently.
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Unformatted text preview: 17. How would the value of the headquarters unit change if the dividends paid on equity became similar to the treatment of interest on debt? Solution: Value of the headquarters unit will increase if the dividends paid on equity become similar to the treatment of interest on debt this is because the biggest advantage of interest payment is that it generates tax shield on interest payment as a result of which the cost of interest is lower effectively on the other hand dividend is an appropriation of profits as a result of which the cost is higher as no tax shield is available. In case treatment becomes similar to that of interest it will also generate tax shield thereby lowering the overall cost and increases the value of headquarter....
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