Loan Subsidy Valuation: An Alternative Approach

Author: Pierru, Axel

Source: The Engineering Economist, Volume 51, Number 3, July-September 2006 , pp. 297-306(10)

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Abstract:

In a recent paper, Jennergren analyzed four loan subsidy valuation methods suggested in authoritative textbooks. He showed that the first three can be derived from a unique formula whose value depends on the nonsubsidized loan amount that is assumed to be replaced by the subsidized loan. When the WACC method is used, this debt replacement must implicitly take into account the target debt-to-value ratio set by the firm. In this article, we suggest an alternative approach that allows us to clearly incorporate the corresponding debt constraint and to determine the resulting adjustment to be made. This adjustment appears to be different from that recommended by Jennergren. More generally, we suggest an alternative view of the consistency of the methods.

Document Type: Research article

DOI: http://dx.doi.org/10.1080/00137910600852863

Affiliations: 1: Center for Economics and Management, IFP School, IFP, Rueil-Malmaison, France

Publication date: 2006-07-01