Valuation relationships under growth

Abstract

One of the most important topics onvaluation is the appropriate relationshipsbetween cash flows and rateof returns. I review those relationshipsunder the premise, by Myers(1974), of the cost of debt as the rightdiscount for the tax shield. Differenthypotheses have been advanced for the tax shield risk, each one producingdifferent valuation results, especiallywhen growth is present. Theconsequences of some common mistakeson valuation are explored. Onedifference between the results I obtainand results by others is the presenceof growth in the expressions forthe discount rates, which can be usedto asses the empirical validity of eachof the approaches.Cost of capital, return on equity, taxshield value, levered beta.