re: High level finance class is a new level of intense

Bump to continue the thread.

We had an interesting discussion in class last week about unlevering and whether or not we should continue to rebalance debt-to-value

Here is the paper discussed Discounting Tax Shields and the Unlevered Cost of Capital - Peter DeMarzo, Stanford University

quote:

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Abstract: This note derives the relationship between the firm’s unlevered cost of capital and its equity cost of capital for a variety of settings. In addition to unifying a number of existing results, a new arbitrage proof is provided which establishes conditions under which the appropriate discount rate of the firm’s interest tax shields will equal its unlevered cost of capital. These conditions specify that the firm maintains a target leverage ratio, which means that its debt is continuously adjusted according to a target debt-equity (equivalently, debt-to-value) ratio, or to maintain a target interest coverage ratio. This target ratio may vary idiosyncratically over time. Additionally, the firm must have a horizon independent cost of capital, which means that its near-term and long-run cash flows have equivalent current market risk.

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