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Value Under Active and Passive Debt Management Policy
Author(s) -
Appleyard Tony,
Dobbs Ian M.
Publication year - 1997
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/1468-5957.00116
Subject(s) - valuation (finance) , debt , economics , cash flow , discounted cash flow , equity value , debt ratio , corporate finance , internal debt , debt levels and flows , monetary economics , financial economics , finance , actuarial science
The relationship between debt policy and valuation has been extensively analysed in the finance literature; within a Modigliani‐Miller framework, the consensus is that valuation is affected by whether debt is managed actively or passively, and that for finite projects with time varying risky cash flows, it is appropriate to use a weighted average discount rate for valuation only if it is assumed that debt is actively managed. In this paper, the relationship between debt policy and valuation is re‐examined. In particular, it is shown that, under one of the most plausible forms of passive debt policy, valuation using a simple weighted average discount rate is in fact possible.