THE VALUATION AND COST OF CAPITAL OF THE LEVERED FIRM WITH GROWTH OPPORTUNITIES

THE VALUATION AND COST OF CAPITAL OF THE LEVERED FIRM WITH GROWTH OPPORTUNITIES

The Miller-Modigliani (MM) presentation of a growth firm's valuation is revised. A correct expression for the total market value of a growth firm is obtained by explicitly recognizing that future projects affect the existing value of the firm not only through their expected rate of return, but...

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Veröffentlicht in:The Journal of finance (New York) 1978-03, Vol.33 (1), p.65-73
Hauptverfasser: Arditti, Fred D., Pinkerton, John M.
Format: Artikel
Sprache:eng
Schlagworte:
Business structures
Capital
Capital budgeting
Capital costs
Capital investments
Cost estimates
Debt
Economic costs
Economic models
Expected returns
Financial investments
Financial leverage
Growth
Investment return rates
Market value
Projects
Ratios
Utilities costs
Valuation
Value
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Beschreibung
Zusammenfassung:The Miller-Modigliani (MM) presentation of a growth firm's valuation is revised. A correct expression for the total market value of a growth firm is obtained by explicitly recognizing that future projects affect the existing value of the firm not only through their expected rate of return, but also through the increase in the firm's debt capacity that those projects are expected to provide. The growth firm's appropriate investment cutoff rate is noted. The MM capital budgeting criterion survives as the project cutoff rate to be used by the leverage growth firm. The MM valuation equation may provide different valuations for a firm's income-growth component. The MM formula places too high a value on growth.
ISSN:0022-1082
1540-6261
DOI:10.1111/j.1540-6261.1978.tb03389.x