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Calculating the market value of riskless cash flows

Authors
Journal
Journal of Financial Economics
0304-405X
Publisher
Elsevier
Publication Date
Volume
15
Issue
3
Identifiers
DOI: 10.1016/0304-405x(86)90024-3
Disciplines
  • Economics

Abstract

Abstract This paper uses arbitrage arguments to calculate the market value of riskless after-tax cash flows. The market value equals the present value of riskless after-tax cash flows discounted at the after-corporate-tax riskless interest rate. The market value equals the adjusted present value of riskless after-tax cash flows only when the incremental debt used in the adjusted present value calculations equals the market value of the remaining after-tax cash flows. Also, the analysis provides valuation formulas when interest and tax rates are certain but not uniform and when interest rates are uncertain.

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