Publicação
The choice of tax shields’ discount rate on firm valuation: Cruz Vermelha Portuguesa - Sociedade Gestora de Hospitais, S.A. case study
| Resumo: | This dissertation suggests that the tax savings, in firm valuation, are discounted at a rate computed through a model presented in the literature review1, which is different from the rates usually used for this purpose either by the top text books from, for example, Neves (2002), Ross, Westerfield and Jaffe (2005), Berk and DeMarzo (2011), and Brealey, Myers and Allen (2007) or the investment banks. In this model the necessity to fix a priori important parameters such as the interest rate, the debt level or the leverage ratio, and, consequently, the tax shields’ discount rate is challenged, assumptions that are required by Modigliani & Miller (1963), Harris & Pringle (1985), Miles & Ezzell (1980), among others. In this model all these parameters are endogenized. The only assumptions necessary are the risk free rate and the unlevered cost of capital, whereas the capital structure of the company is computed iteratively by the model. A graphic representation of the case study was built from which were drawn theoretical and practical inferences that can be generally used in any case. Moreover, an assessment on the pertinence of the model that determines the tax shields’ discount rate was made, as well as on how the model reconciles with the state of the art. Cruz Vermelha Portuguesa – Sociedade Gestora de Hospitais, S.A. (CVP-SGH,S.A.), a publicly unlisted company, became an interesting valuation case study when, in 2012, the cooperation agreement between CVP-SGH, S.A. and Administração Regional de Saúde de Lisboa e Vale do Tejo (ARSLVT) was suspended after the recommendation of the Portuguese Audit Court of non-renewal of such agreement. In this scenario, CVP-SGH,S.A.’s EBIT drops abruptly to levels that no longer cover totally the interest expenses, which, as we will see, jeopardizes the adoption of the standard WACC valuation method |
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| Autores principais: | Lopes, Ana Margarida Cordeiro |
| Assunto: | Discounted cash flow Tax shields Discount rates Cost of capital Cost of equity Tax shield risk Adjusted present value Equity cash flow Capital cash flow |
| Ano: | 2015 |
| País: | Portugal |
| Tipo de documento: | dissertação de mestrado |
| Tipo de acesso: | acesso aberto |
| Instituição associada: | ISCTE |
| Idioma: | inglês |
| Origem: | Repositório ISCTE |
| Resumo: | This dissertation suggests that the tax savings, in firm valuation, are discounted at a rate computed through a model presented in the literature review1, which is different from the rates usually used for this purpose either by the top text books from, for example, Neves (2002), Ross, Westerfield and Jaffe (2005), Berk and DeMarzo (2011), and Brealey, Myers and Allen (2007) or the investment banks. In this model the necessity to fix a priori important parameters such as the interest rate, the debt level or the leverage ratio, and, consequently, the tax shields’ discount rate is challenged, assumptions that are required by Modigliani & Miller (1963), Harris & Pringle (1985), Miles & Ezzell (1980), among others. In this model all these parameters are endogenized. The only assumptions necessary are the risk free rate and the unlevered cost of capital, whereas the capital structure of the company is computed iteratively by the model. A graphic representation of the case study was built from which were drawn theoretical and practical inferences that can be generally used in any case. Moreover, an assessment on the pertinence of the model that determines the tax shields’ discount rate was made, as well as on how the model reconciles with the state of the art. Cruz Vermelha Portuguesa – Sociedade Gestora de Hospitais, S.A. (CVP-SGH,S.A.), a publicly unlisted company, became an interesting valuation case study when, in 2012, the cooperation agreement between CVP-SGH, S.A. and Administração Regional de Saúde de Lisboa e Vale do Tejo (ARSLVT) was suspended after the recommendation of the Portuguese Audit Court of non-renewal of such agreement. In this scenario, CVP-SGH,S.A.’s EBIT drops abruptly to levels that no longer cover totally the interest expenses, which, as we will see, jeopardizes the adoption of the standard WACC valuation method |
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