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The Net Present Value of Future Investment Opportunities: Its Impact on Shareholder Wealth and Implications for Capital

Budgeting Theory Author(s): John C. Woods and Maury R. Randall Reviewed work(s): Source: Financial Management, Vol. 18, No. 2 (Summer, 1989), pp. 85-92 Published by: Blackwell Publishing on behalf of the Financial Management Association International Stable URL: . Accessed: 07/01/2012 11:13
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Its Impact on Opportunities: for and Wealth Shareholder Implications Capital Budgeting Theory Investment
R. John C. Woodsand Maury Randall
Institute JohnC. Woods anAssociateProfessor Financeat theStevens is of NJ. R. Hoboken, Maury Randallis anAssociateProfessor of Technology, NJ. Lawrenceville, of Financeat RiderCollege,

One of the most widelyacceptedtenets of financial theory is that the objectiveof financialmanagement should be to maximizeshareholder wealth.This preand the implicationthat shareholderwealth is cept measured NPV is generally citedas the justification by for the NPV criterion in applied capital budgeting. the NPVandshareholder wealth However, linksbetween arenot madeexplicitin the literature. Textbooks merely state the equivalenceas a generalpremisewithout rigorousproof.

The authors express their special gratitude to Robert L. Greenfield for his assistance in developing the ideas in this paper. The comments by Jean Gray and Ilhan Meric were also quite helpful.

In the followinganalysisof projectvaluation,it is shownthat this assumedequivalenceis not valid in a wide range of cases. Following conventionalpreceof cash dents,it is assumedthatthe riskiness a project's flowsequalsthe riskinessof cashflowsfromthe firm's other assets and the firm'sweightedcost of capitalis utilized in calculatingNPVs. The firm'scurrentdebt ratio,expressedin marketterms,is assumedto represent the firm'stargetratioandto be maintained during the financingand implementation the project.The of existence of a target ratio is predicatedon the asratiowhichminisumptionof an optimaldebt/equity mizes the firm's cost of capital, a thesis commonly in propounded the literature.1



The analysis begins in a hypothetical world of efficient financial markets and the following points are demonstrated in that environment: (i) If a project is announced or anticipated by the marketprior to the funding (at t = 0) of the project, NPV does not measure the gain in shareholder wealth at t = 0. (ii) In this idealized environment, there is an identifiable and quantifiable value in providing financial marketswith convincing evidence that the firmwill be implementing positive NPV projects in the future. The analysis is then extended to cases of asymmetryof information and related imperfections in financial markets. In this environment, the following points are developed: (i) To the extent that such inefficiencies restrict the ability of the firm to borrow against future investment opportunities (FIOs), the basic premise of capital budgeting is rendered invalid. In such cases NPV will exceed shareholder wealth when both are calculated at the time the project is announced. (ii) A bias is introduced into the capital budgeting process which favors distant over near-term projects, even though their contribution to shareholder wealth may be less. (iii) Managerial attempts to overcome the inefficiencies can result in enhanced shareholder wealth. In the case of either efficient or imperfect financial markets there will be a discrepency between NPV and gain in shareholder wealth. In the efficient market case the discrepency occurs at the time of funding, t = 0. In the imperfect market case it occurs at the time of project anticipation, t = -n.

In order to establish the equivalence of these two terms, they must be precisely defined. The commonly accepted textbook definition of NPV as the present
'Brealey and Myers [1, p. 44], Weston and Copeland [8, pp. 600-602], Moyer, McGuigan, and Kretlow [4, p. 400], and Schall and Haley [7, p. 333] hypothesize the existence of an optimal capital structure. While this is not a necessary condition for the existence of a target debt/equity ratio, it is a sufficient condition. Many of the conclusions would still be valid under the weaker assumption of a non-optimal target structure. The authors are indebted to Martin Gruber for making this observation.

I. NPVand ShareholderWealth

value of all cash flows (assuming equity financing) discounted at the firm'sweighted cost of capital is used. This is designated as ka Wd(l - T)kd + We where ke, kd = the required return on debt, ke = the required return on equity, wd = the percentage of debt in target capital structure measured in market terms, We= the percentage of equity in target capital structure (we = 1- wd), and T = the marginal corporate tax rate. Shareholder wealth is generally accepted as the aggregate market value of the common shares, which in turn is assumed to be the present value of the cash flows which will accrue to shareholders, discounted at their required return on equity. This concept of shareholder wealth ignores the information asymmetry possibility which is central to this study-the market may not be privy to or may not believe certain financial information possessed by management. Here it will be assumed that the management insiders in fact know the true financial future of the firm. When management is either unwilling to divulge information or unable to convince markets of future cash flows, a divergence will exist between the market value of shares and true shareholder wealth. In this case shareholder wealth is defined as the present value of the true future cash flows, discounted at ke, regardless of whether or not they are reflected in the market valuation (i.e., shareholder wealth is what the market value would be if markets shared management's knowledge). This discrepancy between market value and shareholder wealth has important implications for the financing of a firm and its cost of capital, inasmuch as a firm is posited to maintain its optimal or target capital structure in market terms. Consider a firm startingwith an optimal capital structure that develops a future investment opportunity (FIO), the NPV of which is not reflected in its current market price. The firm remains at its target debt/equity ratio and any attempt to borrow against this future value would increase the firm's cost of capital. It is assumed that such an action would not be permissible within the mandate of maximizing firm value. In analyzing the effect of information asymmetryon the NPV-shareholder wealth relationship, two polar alternatives will be explored. First is the "efficient market" alternative as elaborated by Brigham and Tapley [2] who contend, "Investors have correctlyanticipated the total value that management expects to add through capital budgeting(the sum of all projects' NPVs) duringthe



Exhibit1. Net PresentValue Analysisof One Year ProjectWhoseValue is FullyReflected in the StockPrice
Initial Outlay at t = 0 Co = $9,000 Pre-tax Cash Inflow at t = 1 Ri = $11,460 T = 50% ke = 20% kd = 10% Wd= 2/3 We= 1/3 ka = weke + wdkd(1- T) = 10% $11,460 Project Revenue (t = 1) 9,000 Depreciation Taxable Income 2,460 Taxes 1,230 Net Cash Flow (NCF at t = 1) (11,460-1,230) 10,230 Discounted Value of NCF at ka = 10% (t = 0) 9,300 300 Net Present Value at t = 0: $9,300 - $9,000

Exhibit2. ResidualCashFlowAnalysisof One Year ProjectWhoseValue is Fully Reflectedin the StockPrice

Initial Outlay at t = 0 Co = $9,000 Pre-tax Cash Inflow at t = 1 RI = $11,460 Debt Financing Do = $6,200 Eo = $2,800 Equity Financing Tax Accounting $11,460 Project Revenue 9,000 Depreciation 620 Interest1 Taxable Income 1,840 920 Tax (50%) 920 Net Income 560 Dividends Paid2 Cash Accruing to Original Shareholders Repurchase of Debt and Equity Residual Cash Present Value of Residual Cash at 20% 1$6,200 at 10%. 2$2,800 at 20%.

Cash Flow $11,460 -620 -920 -560 9,360 -9,000 360 300

holdsthen If positive budgetingperiod.thiscondition in be NPVprojectswill already reflected thefirm's current stockprice.Hence,takingon (or announcing) such a projectwillhave no effecton thefirm's value." and reasonably Brigham Tapleyconsiderthisapproach realistic"formost large,widelyfollowedfirms." Under a firm,originallyat its target this scenario,as soon as capitalization,uncoversa new FIO, its marketprice will immediately bythe NPV of the FIO,regardless rise of when the FIO will be announcedor actuallyundertaken. This rise in equityprice will cause the firm to deviate from its targetdebt/equityratio and the firm must, at that time, issue additionaldebt at rate kd to restoreits optimalcapitalstructure. The secondpolaralternative be designatedthe will "zerocredibility" condition.Under this scenario,the firmannounces FIObutthe market an does not believe the announcement, thus the marketprice of the and equitydoes not changeto reflectthe NPV of the FIO and no additionaldebt can be issued.Alternativescenarioswhichwouldleadto the sameno-new-debt situation are the withholdingof knowledgeof the FIO by or of valueof the management skepticism the collateral FIO by the market.The latterwouldbe manifestedin prohibitiveinterest rates on any new debt issued to restorethe targetdebt/equity ratio. In reality,marketsprobablyexhibit partial credibility regarding FIOs;some but not all of the present valueof FIOsis reflectedin equityvalueandrepresents suitablecollateralfor additional at borrowing kd.This for empiricalstudconjectureprovidesopportunities ies but is beyondthe scope here.

Consider evaluation a simpleone-year the of project which involvesa $9,000 initial outlayat t = 0 and an cashflow of $11,460at t = 1.2The expectedbefore-tax is assumedto fall into the same risk class as project investmentstypicallyundertaken the firm and the by are net presentvalue calculations shownin Exhibit1. Assumingthe projecthad not been previouslyanticipatedin financialmarkets,the marketvalue of the rise outstanding equityin the firmwill presumably by $300, the project'snet present value, upon the announcementat t = 0 of the firm'sintentionto embark in et uponthe project.As demonstrated Greenfield, al. [3], to offset the reductionin the firm's debt-equity fromthe risein equityvaluerequires ratioresulting the issuanceof $600 additionaldebt. There then remains only $8400of the $9000initialoutlayto be financedat the 2:1 ratio between bonds and shares ($5600 and the $2800 Maintaining firm's respectively). target debt/equiratioof 2:1in financing projectthusinvolvesthe the ty issuanceat t = 0 of total debtof $6200($600 + $5600) and only $2800in equity. Exhibit2 showsthe portionof the firm'sactualtax statementthat can be ascribedto the projectand the calculationof the cash flow accruingto the original
2This example was previously presented in [3].

II.The EfficientMarket/Full Case: A Simple Illustration Credibility



Exhibit 3. Net Present Value Analysis of Marginal Project

Initial Outlay at t = -1 C- = $545.45 Pre-tax Cash Inflow at t = 0 Ro = $654.55 Project Revenue 545.45 Depreciation Taxable income 109.10 Tax (50%) Net Cash Flow (NCF, t = 0) Discounted Value of NCF at 10% (t = -1) Net Present Value at t- 1: 545.45 - 545.45 $654.55

Exhibit4. ResidualCashFlowAnalysisof Marginal WithProceedsof ProjectPurchased Debt Balancing

Initial Outlay at t = -1 C-i = $545.45 Pre-tax Cash Inflow at t = 0 Ro = $654.55 Debt Financing D- = $545.45 Tax Accounting $654.55 Project Revenue 545.45 Depreciation Interest (10% X 545.45) 54.55 Taxable Income 54.55 Tax 27.28 Repayment of Debt Principal Residual Cash at t = 0

54.55 600.00 545.45 0.00

Cash Flow $654.55 -54.55 -27.28 -545.45 27.27

owners of the firm if the project is financed as described above. After account is taken of the $920 tax payment, the $620 interest payment, the $560 dividend payment to the holders of newly issued shares, and the issuance and year-end repurchase of $6200 debt and $2800 equity, there will remain $360 terminal cash for the benefit of the firm's original ownership. When this residual cash flow is discounted at the 20% rate (the required rate of return on equity), its present value equals the project's $300 net present value. Thus, in this simple case NPV equals the change in shareholder wealth.

Consider the impact of announcing the previous project at t = -1, when it is planned, rather than at t = 0, when it is to be financed. It is assumed that this announcement per se will not in any way affect the other future cash flows of the firm. In addition, following the Brigham-Tapleyefficient market assumption, the market immediately incorporates the information in the equity valuation and permits borrowing against this value at the rate kd. If the after-tax cash flows are discounted back to t = -1, instead of t = 0, then

Priorto its Ill. Market Anticipation UnderFullCredibility Funding


10,230 (1.10)2

9000 1.10 -=

300 272.73, (1) 1.10

= net present value calculated at t = -1 where NPIV_ of an investment which is to be funded and implemented at t = 0. The existence of NPV_Imeans that, in this idealized world, the value of the firm's shares will rise at t = -1 by $272.73. It is assumed that prior to the announcement of the project the firm was financed at the target ratio of wd = 2/3 and We = 1/3. The firm must then

borrow 2($272.73) = $545.45 to restore its target debtequity ratio and maintain its cost of capital at 10%. Assume the funds borrowed at t = -1 ($545.45) may then be invested in a marginal one-year project which has an internal rate of return equal to the cost of capital. As verified in Exhibit 3, such a zero-NPV project with a cost of $545.45 would provide pre-tax cash of $654.55 at t = 0. The ability to borrow at kd, based on an NPVI > 0, and to invest the funds in a zero-NPV marginal project returning ka,will enable the firm to accrue shareholder wealth at t = 0 greater than NPVo. Exhibit 4 shows that by undertaking this marginal project at t = -1, shareholders will accrue addditional cash of $27.27 at t = 0. Total shareholder wealth at t = 0 will thus equal the NPV of the project of $300 as previously calculated, plus the $27.27 resulting from the marginal project, for a total of $327.27. EI is now defined as the value at t = -1 of this total wealth, discounted at ke. Thus, E-1 = 327.27/1.20 = $272. 73, an amount equal to NPVI. With perfect market efficiency and announcement (or anticipation) at = NPVn. However, Eo ($327.27 in this t = -n, E-n exceeds NPVo (of $300). example) Even if the firm did not have a new project with a zero NPV, shareholders could still achieve the benefits derived above. The firm could rebalance its capital structure by borrowing $182.82 against NPVI and use the proceeds to purchase its own shares at fair market value and thereby rebalance its capital structure at the optimal ratio. It can be demonstrated that this strategy provides net cash benefits which are equivalent to investment in a project with zero NPV.3
3Computations are available from the authors upon request.



Thequestionhasbeenraisedin financeliterature by Myers[5, 6] andothersas to whetherin fact a firmcan favorable investments borrow its (PVGO's against future in Myers'terminology). is Suchborrowing a necessary condition for shareholderwealth at the time of anto at nouncement equalNPV as calculated thattimeby withdiscounting the firm's at classical capitalbudgeting valuedidnot cost of capital.If, in reality,eithermarket riseto reflectthe valueof the FIO or if capitalmarkets did not permitborrowing againstthe FIO at kd, then to increasedebt wouldperturbthe firm's anyattempt debt/equityratio and/orincreaseits weightedcost of under capital.However,suchactionsarenot permitted the assumption maximization shareholder of of wealth at the optimalcapitalstructure. With the assumptionthat the previouslyspecified therewould $272.73.Underthezerocredibility scenario,
be no impact of the FIO on market value at t = -1, no at t = 0. Thus, Eo = 300 and by definition,4 E1_ = of 300/1.20 = $250, an amount less than the NPV_1 cash flows will occur, NPVo = $300 and NPV. 1

IV.The ImperfectMarket Case

to attributable the projectwith a net presentvalue of

NPVo at t = 0, can be calculated as:
Eo = NPV-n(1 + ke)n

x (1 + ke)n

(1 + ka)n = NPVo 1 +ke n 1 +ka With ke > ka, shareholder wealthat t = 0 exceeds NPVo, .



I Eo- NPVo= NP-Vo +ke J1 +ka

n - 1 (4)

borrowing permittedat thattime,andno cashaccrued $272.73.

V. The GeneralCase: Efficient Markets/Full Credibility

The analysisof the previousexampleon efficient marketsmaybe extendedto accountfor an announcement at anypriortime period.DefineNPVn as
NPVo NPV-n= (1+ka)n , (2)

results from borrowingfunds at rate kd in order to restore the target ratio and investingthese funds in zero-NPVprojects wherereturn is earned. ka marginal, a detailedverification Equaof (Theappendix provides tion (3) basedon actualafter-tax cashflows.) In summary, following importantconclusions the havebeendemonstrated. the First,in efficientmarkets, increasein shareholder wealth derivedfrom a future investmentopportunity exceedsthe net presentvalue of the project, withbothmeasured t = 0. Second,this at fact providesan incentivefor the firmto provideinformationso that the projectis anticipated soonerrather thanlater,ceterusparibus. seen fromEquation(3), As givenNPVo,ke, andka < ke, this extragain in sharen, the lead time of the announcement.
holder wealth, which equals Eo - NPVo, increases with

The additional gain in shareholder wealth, Eo - NPVo,

whereka is the cost of capitalandn is the numberof years prior to the initial outlay for the project.5As NPV-nrepresentsequity value, the expected and requiredreturnon that quantityis the cost of equity,ke. The previousillustrationshowedthat this returnwas in fact realizedwhen the optimal target debt-equity ratiowas maintainedat t = -1. In general,if a project
is announced at t = -n, shareholder wealth at t = 0, EA

VI.The GeneralCase: Informationally ImperfectMarkets

Now considerthe generalcase in whichthe market does not believethe announcement the FIO andthe of firm'sequitypricedoes not changein responseto the
announcement. Without an increase in the value of the equity at t = -n (or fully accepting Myers' hypothesis), no additional borrowing can be undertaken to finance a zero-NPV project. Repeating the prior prescription, a clear distinction between shareholder equity and market price must be made. While the inefficiency of the market precludes a change in market equity value, the shareholders clearly have some wealth at t = -n, for they


4Note that market value at t = -1 equals 0 because of the zero= 250. credibility assumption despite the existence of E_ 5NPVois the classically determined NPV as of the time of financing, the present value of the cash revenues in each time period, discounted at the firm'sweighted cost of capital, ka, less the original cash outlay,



Exhibit 5. The Relationship Between NPV and Shareholder Wealth Attributable to a Future Investment Opportunity

Il+kEA k E 0N V0 l+ E]n I E0 NPV0



. . . . . .. . . . . . . ................

. ........

0 .,


..... .. .



(1+k A)


(l+kE) NPVo





perceive the investment will have a value NPVo in n years. Inasmuch as shareholders require a return of ke, they would not part with their holdings for less than NPVo/(1 +ke )n. Thus E-n = NPVo/(1 + ke)n measures their perceived wealth at that time. In the zero credibility case, NPVOwill not be reflected in market value until t = 0. Thus, Eo clearly equals NPVo. Accordingly, for any time prior to t = 0, E-n = NPVo /(1 + ke)n < NPVn = NPVo /(1 + ka )n. Managerial decisions made at t = -n on the basis of calculated NPV's do not necessarily reflect shareholder preferences. An example will point out the seriousness of this discrepancy.Assume management is deciding whether to immediately implement Project 1, based on current

technology which would have an NPV = $1,150, or to develop a more profitable technology leading to Project 2, which could be implemented in 5 years with an NPV at that time of $2,000. If ka = 10%, and ke = 20%, as assumed in earlier examples, the current NPV of the second alternative would be 2,000/(1.10)5 = $1,240 and would be favored by management. However, if adoption of this alternative would not result in a current rise in the price of the shares, the firm could not borrow to invest in zero-NPV projects and therefore could not accumulatethe requiredvalue of $1,240 (1.20)5 = $3090 in year 5. Since shareholders required a return of ke = 20%, the value to them of $2,000 of equity in year 5 would only be 2,000/(1.20)5 = $805. They are, therefore, worse off with the project which has the higher



NPV. Calculated NPV ($1,240)exceededshareholder wealth ($805) by 54% and led to a non-optimaldecision. Alternatively, acceptanceof Project 1 and comEO pounding of $1,150for5 yearsat the expectedreturn of 20%generates at $2,860,an amountfarin excess E5 of the E5 of $2,000available fromProject2. This bias towardsselection of future investments overnear-term investments extendsinto the analysis of projectswith differentlives where it is assumedthat both can be replicatedin the future.Classicaltheory utilizesthe firm'scost of capitalto discountcashflows of the futureinvestments. This analysisshowsthe apis invalidif the FIOsdo not enhancethe firm's proach debt capacity.In such cases, the same discount rate cannotbe appliedto a projectwith a ten-yearlife and a series of two five-yearprojects.The same objection also applies to the classicalanalysisof a firm facing wherethe samediscount multiperiod capitalrationing rateis utilizedfor presentandfutureinvestments.

has (ii) Management a clear incentiveto attempt to in increaseits credibility financialmarketsas the abilityto borrowon the basisof FIOswill increase shareholder wealthby a quantifiable amount.

1. R.A. Brealeyand S.C. Myers,Principles Corporate Finance, of 3rded., NewYork,McGraw Hill, 1988. 2. E.F. Brigham T.C.Tapley, and and "Financial Leverage the Use of the Net PresentValueInvestment A Criterion: Reexamination,"Financial Management 1985),pp.48-52. (Summer 3. R.L. Greenfield,M.R. Randall,and J.C. Woods, "Financial Leverageand the Use of the Net PresentValue Investment Financial Criterion," Management (Autumn1983),pp.40-43. 4. R.C. Moyer,J.R. McGuigan, W.J.Kretlow, and Contemporary Financial 2nd Management, ed., St. Paul,MN, WestPublishing Co., 1984 "Determinants Corporate of 5. S.C.Myers, of Borrowing,"Joumal Financial Economics (1977),pp. 147-175. 6. Journalof Finance , "The CapitalStructurePuzzle," (July1984),pp.575-592. 7. L.D. SchallandC.W.Haley,Introduction Financial to Management,5th ed., NewYork,McGraw Hill, 1988. 8. J.F. Westonand T.E. Copeland, Finance,8th ed., Managerial Chicago, DrydenPress,1986.

lies The realityof financial markets obviously somemarwherebetweenthe efficientmarketandimperfect ketcasesconsidered here.SomeFIOsareacknowledged by the marketbut due to agencyproblems, uncertainty FIOs as options,and perceptionsof greater regarding thanassetsin risk,theyhaveless debt-carrying capacity This has been well-documented Myersand by place. others.As a result, the wealth generatedwill be less in thanthatgenerated aworldof fullyefficientmarkets. NPV and Exhibit illustrates relationship 5 the between forprojects which anticipated to are shareholderwealth prior implementation under the efficient and imperfect market In market shareextremes. theefficient environment, + + holder wealthat t = 0, Eo = NPVo(1 ke)n/(1 ka)nexceedsNPVo. Intheimperfect market case,a discrepency existsbetweennet presentvalue andprojectvalue at t
= -n:

t = 0.

as the investors' Define equityat t = -n whichis E-n to at attributable a projectwhichwill be undertaken

E-n = (Al)

(1 + ka)n

At t = -n + 1, investors'equity will equal the net presentvalueof the futureprojectplus a residualcash in flow RCFn+1, which resultsfrom borrowing order and to maintainthe target debt-equityratio (wd/We) investing the borrowedfunds (D-n) into a one-year project(p) withNPVp= 0:
NPVo E-n+ = (1 + ka) ka)n1 Wd
D-n = E-n We =


(1 +




-= E- . (5)
+ ke)n

+ RCF-n+1,


Inthe lattercase,twoadmonitions management for are clearlyvalid: are (i) Conventional capitalbudgeting approaches biased towardslong-termFIOs in potentialopposition to shareholder interests.Discountingmustbe done at the ratekeratherthankato determinethe shareholder wealthattributable FIOs. to

NPVo X (1 + ka)n



NPVp =

R-n + 1- Tax


- C.


1 + ka




D-n depreciationat end of year abovefor TaxandC in (A4) gives

0= 1 + ka

+ = before tax cash flow of the 1-yearproject; C = - C); and C = cost of the investment; Tax = T(R_-n+ the 1. =

Substituting (A3) into (A7') resultsin

NPVo RCF-n+I = (1 + ka)n X We



[ka - kd(1-T)].


R-n+1(1- T) + T(D-n)-Dn(1 + ka) (A4')

Since ka = we ke + wd kd(1- T), and wd + NPVo Wd

= 1,

+ Solvingfor R-n 1:
D-n(1 + ka - T) R-n+l = 1-T (A5)

RCF-n+ = (1 + ka)n

[ke- kd(1- T)].


Substituting (A9) into (A2),

NPVo E_n +1 = + (1 + ka)n-I NPVo
S{1 + ka + Wd[ke-kd(1- T)]),

NPVoWd (1 + ka)n

cashflow,CF-n +1: Next,calculateafter-tax

-Int- Tax. + CF-n = R-n+1 (A6)

[ke - kd(1- T)I,

Int = interest expense in year -n +1 = D-nkd; Tax =

- C - Int) = T(R-n+1 - D-n - D-nkd); and T(R-n+1 CF-n +1 = (R-n + 1 -D-nkd)(1 - T) + TD_-n.

(1 + ka)n NPVo

After repayment of D-n at t = -n + 1, there is a

+ ke),

residualcashflow RCF,
= CF-n+1-D-n RCF_-n+

(1 + ka)n = En(1 + ke). (A1O)



Substituting (A5) into (A7)

Equityvaluegrowsat the ratekewhen the targetratio is attainedbyborrowing againstthe futureinvestment and the proceedsare utilizedto purchasea zero NPV project.By repeatingthe above procedureeach consecutive period to t = 0, Equation (3) is obtained:
Eo = E-n(1 + ke)n NPVo (1 + ke)n. (All)

= RCF-n+l

D-n(1 + ka- T) 1-T

- D-nkd-nk (1- T) D-n

= D-n[(1 + ka- T)- kd(1- T)- (1 - T)]

= D-n[ka-kd(1T)]. (A7')

(1 + ka)n