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- W3125802755 abstract "Academics and professionals frequently use the yield to maturity (YTM) as a proxy for the cost of debt when valuing firms using discounted cash flow (DCF). This paper demonstrates that this practice is incorrect because YTM is calculated based on promised cash flows, whereas the traditional DCF valuation of firms is based on expected cash flows. The correct cost of debt in DCF valuations of firms is the expected return on debt. Valuations of firms that use the YTM as the cost of debt underestimate the correct value. This distortion is particularly large for highly levered firms where the difference between YTM and expected return on debt is sizable. These results are demonstrated using the recent highly publicized leveraged buyout of Clear Channel Communications Inc. We show that if YTM rather than expected return on debt were used in the valuation process, the price offered for the shares would have significantly underestimated their fair value." @default.
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- W3125802755 date "2009-01-01" @default.
- W3125802755 modified "2023-09-26" @default.
- W3125802755 title "Why Does DCF Undervalue Equities" @default.
- W3125802755 hasPublicationYear "2009" @default.
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