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Constant Interest Coverage Policy

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What is a constant interest coverage policy and how does it impact the levered value of a project?

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//This paper talks about constant interest coverage policy and its impact the levered value of a project. This is used to determine the level of easiness through which, a company can pay interest expenses on outstanding debt. //

A constant debt-equity ratio is a convenient assumption that simplifies the analysis, but it is not used by all the firms. Therefore, the other leverage polices such as constant interest coverage and predetermined debt levels are considered. When it is assumed that a constant debt-equity ratio is at place, the equity cost of capital and WACC for a project changes over time as with the change in debt-equity ratio. This causes some difficulties to implement WACC or weighted average cost of capital and FTE or free cash flow methods.

When a firm uses leverage to shield income from corporate taxes, it ...

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