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This result is inconsistent as discussed in fernndez

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Unformatted text preview: 623.61 0.00 Ke t=0 t=4 10.49% 10.41% Harris and Pringle 3,834.24 498.89 124.72 10.78% 10.65% Myers 3,999.27 663.92 -40.31 10.42% 10.33% Miles and Ezzell 3,843.48 508.13 115.48 10.76% 10.63% Miller 3,335.35 0.00 623.61 12.16% 11.75% With-cost-of-leverage 3,602.61 267.26 356.35 11.37% 11.13% Modigliani and Miller 4,080.75 745.40 -121.79 10.26% 10.18% Table 13 Valuation of Toro Inc. According to the Nine Theories if Growth After Year 3 is 5.6% Instead of 2% Equity Value of tax Leverage (Value in t = 0) value (E) shield (VTS) cost Fernández (2004) 6,615.67 1,027.01 Damodaran 6,234.21 645.55 Ke t=0 t=4 0.00 10.29% 10.23% 381.46 10.63% 10.50% Practitioners’ 5,823.40 234.75 792.27 11.03% 10.81% Harris and Pringle 6,410.27 821.61 205.40 10.47% 10.37% Myers 7,086.10 1,497.44 -470.43 10.00% 9.94% Miles and Ezzell 6,425.48 836.83 190.19 10.45% 10.36% Miller 5,588.66 0.00 1,027.01 11.29% 11.01% With-cost-of-leverage Modigliani and Miller 6,028.81 440.15 586.87 10.82% 10.65% 12,284.86 6,696.20 -5,669.19 8.15% 8.17% Table 13 is the valuation of Toro Inc. if the growth after year 3 were 5.6% instead of 2%. Modigliani and Miller and Myers provide a required return on equity (Ke) lower than the required return on unlevered equity (Ku = 10%), which is an inconsistent result because it does not make any economic sense. 3. How Is the Company Valued when It Reports Losses in One or More Years? In such cases, we must calculate the tax rate that the company will pay, and this is the rate that must be used to perform all the calculations. It is as if the tax rate were the rate obtained after subtracting the taxes that the company must pay. IESE Business School-University of Navarra - 13 Example. The company Campa S.A. reports a loss in year 1. The tax rate is 35%. In year 1, it will not pay any taxes as it has suffered losses amounting to 220 million. In year 2, it will pay corporate taxes amounting to 35% of that year’s profit less the previous year’s losses (350 – 220). The resulting tax is 45.5, that is, 13% of th...
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