R & D CORPORATE VALUATION, STANDARD RECAPITALIZATION STRATEGIES AND THE VALUE OF TAX SAVINGS IN TEXTBOOK VALUATION FORMULAS by B. SCHWETZLER* 2000/46/FIN * Professor, Chair of Financial Management, Leipzig Graduate School of Management (HHL), Jahnalle 59, D-04109 Leipzig, FRG Visiting Scholar, INSEAD, Boulevard de Constance, 77305 Fontainebleau Cedex, France. A working paper in the INSEAD Working Paper Series is intended as a means whereby a faculty researcher’s thoughts and findings may be communicated to interested readers. The paper should be considered preliminary in nature and may require revision. Printed at INSEAD, Fontainebleau, France. Corporate Valuation, Standard Recapitalization Strategies and the Value of Tax Savings in Textbook Valuation Formulas Bernhard Schwetzler* * Professor, Chair of Financial Management, Leipzig Graduate School of Management (HHL), Jahnalle 59, D-04109 Leipzig, FRG Visting Scholar, INSEAD, Boulevard de Constance, 77305 Fontainebleau, CEDEX e-Mail:
[email protected]; 2 Abstract Typically, in finance and valuation textbooks three different formulas, known as the weighted average cost of capital (WACC)-, the adjusted present value (APV)- and the flow to equity (FTE)- approach are proposed to calculate the present value of a levered firm. Recent results in research suggest that these formulas imply different types of recapitalization strategies, predetermining either absolute future debt levels or capital structures in future periods (D-strategy and L- strategy) leading to different tax shields and firm values if future firm values are uncertain. This paper will show that one of these two strategies attributed with riskless tax savings (the D-strategy) is not admissible in the expectations adaption regime necessary to apply risk adjusted CAPM-based rates of return on multiperiod uncertain cash flows.