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It is as if the tax rate were the rate obtained after

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Unformatted text preview: e EBT for year 2. Consequently, the effective tax rate is zero in year 1, 13% in year 2, and 35% in the other years. 4. Conclusion The paper shows that the ten most commonly used methods for valuing companies by discounted cash flows always give the same value. This result is logical, since all the methods analyze the same reality under the same hypotheses; they differ only in the cash flows taken as the starting point for the valuation. The ten methods analyzed are: 1) Free cash flow discounted at the WACC; 2) Equity cash flows discounted at the required return on equity; 3) Capital cash flows discounted at the WACC before tax; 4) APV (adjusted present value); 5) The business’s risk-adjusted free cash flows discounted at the required return on assets; 6) The business’s risk-adjusted equity cash flows discounted at the required return on assets; 7) Economic profit discounted at the required return on equity; 8) EVA discounted at the WACC; 9) The risk-free rate-adjusted free cash flows discounted at the risk-free rate; and 10) The risk-free rate-adjusted equity cash flows discounted at the required return on assets. The paper also analyses nine different theories on the calculation of the VTS, which implies nine different theories on the relationship between the levered and the unlevered beta, and nine different theories on the relationship between the required return on equity and the required return on assets. The nine theories analyzed are: 1) Fernández (2004), 2) Modigliani and Miller (1963), 3) Myers (1974), 4) Miller (1977), 5) Miles and Ezzell (1980), 6) Harris and Pringle (1985), 7) Damodaran (1994), 8) With-cost-of-leverage, and 9) Practitioners’ method. 14 - IESE Business School-University of Navarra The differences between the various theories on the valuation of the firm arise from the calculation of the value of the tax shields (VTS). Using a simple example, we show that Modigliani and Miller (1963) and Myers (1974) provide inconsistent results. The paper contains the most important valuation equations according to these theories (Appendix 2) and also shows how the valuation equations change if the debt’s market val...
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