New method solves circularity issue in corporate financing decisions.
The article addresses the problem of how to calculate the value of a company's cash flows using the right discount rate. Most authors assume a constant level of debt and a fixed discount rate, but this may not be accurate. The authors suggest an iterative solution that considers the changing relationship between the cost of equity and the cost of debt as leverage changes. This approach aims to solve the circularity problem in corporate finance calculations.