Acta Oeconomica Pragensia 2008, 16(3):13-31 | DOI: 10.18267/j.aop.91

Effect of Capital Structure on Business Valuation Using Various DCF Methods

Pavla Maříková, Miloš Mařík
Ing. Pavla Maříková, CSc.; Katedra financí a oceňování podniku, Fakulta financí a účetnictví, Vysoká škola ekonomická v Praze, marikova@vse.cz.
Prof. Ing. Miloš Mařík, CSc., vedoucí Katedry financí a oceňování podniku, Fakulta financí a účetnictví, Vysoká škola ekonomická v Praze, marik@vse.cz.

Income valuation is a fundamental valuation approach. One question still open is the discount rate calculation. One factor impacting the discount rate is a capital structure. Nevertheless, the structure has to be in market values. It means that the knowledge of the result is a precondition for the calculation. The solution lies in an iterative technique based on recursive progress. It is also necessary to select suitable reagency functions expressing relations between equity cost and leverage ratio. The traditional reagency function is employed according to MM II, whereas the modified reagency function is derived by other authors. In addition, the article analyzes main factors impacting the size of error arising when discount rate calculation using a DCF method is not based on capital structure in market values. This analysis is made for both MM and modified reagency functions.

Keywords: value, Business valuation, DCF, discount rate, capital structure, equity cost, WACC
JEL classification: G30, G32

Published: June 1, 2008  Show citation

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Maříková, P., & Mařík, M. (2008). Effect of Capital Structure on Business Valuation Using Various DCF Methods. Acta Oeconomica Pragensia, 16(3), 13-31. doi: 10.18267/j.aop.91
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