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Investment project valuation: a new equity perspective.
INTRODUCTION
There are two possible cases for the financing of a project: either (first case) the firm targets a fixed debt ratio and the project's debt schedule is included in the calculation of this target debt ratio or (second case) the firm targets absolute debt amounts--i.e., in dollars--over the project's life.
In the first case, the project's value is obtained by discounting the project's operating cash flows at the firm's constant WACC discount rate (computed with the firm's target debt ratio). To determine the project's equity value by using the equity residual method, one must then consider a (theoretical) debt repayment schedule such that ...
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