bankruptcies,thedirectcostofbankruptcyseemstobeabout
5 percent.
8 A. Shapiro, Modern Corporate Finance (New York:
Macmillan,1989;S.Titman,“TheEffectofCapitalStructure
on a Firm’s Liquidation Decision,” Journal of Financial
Economics 13 (1984): 137–151; E. Altman, “A Further
Empirical Examination of the Bankruptcy Cost Question,”
Journal of Finance(1984): 1067–1089.
9 The levered beta used in Illustration 6.2 was 1, the
debt-to-equityratioassumedforthestable-growthperiodwas
21.36 percent and the tax rate was 33 percent.
10 As an illustration, computing the return on capital at
Googleusingthemarketvalueofthefirm,insteadofbook
value, results in a return oncapital of about 1 percent. It
wouldbeamistaketoviewthisasasignofpoorinvestments
on the part of the firm’s managers.
11 Thisistrue,though,onlyiftheexpectedpresentvalueof
thecashflowsfromdepreciationisassumedtobeequaltothe
present value of the return of the capital invested in the
project.Aproofofthisequalitycanbefoundin mypaper
“Value Enhancement: Back to the Future” (Contemporary
Finance Digest 2 [1999]: 5–51).
12 Notethatthisassumptionispurelyforconvenience,since
it makes the net present value easier to compute.