Valuing companies with a fixed book-value leverage ratio
AbstractWe develop valuation formulae for a company that maintains a fixed book-value leverage ratio and claim that it is more realistic than to assume, as Miles-Ezzell (1980) do, a fixed market-value leverage ratio. The value of tax shields depends only on the present value of the net increases of debt. The value of tax shields in a world with no leverage cost is the tax rate times the current debt plus the present value of the net increases of debt. We also show that the appropriate discount rates for the equity cash flows and for the expected value of the equity are different.
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Bibliographic InfoPaper provided by IESE Business School in its series IESE Research Papers with number D/614.
Length: 37 pages
Date of creation: 03 Nov 2005
Date of revision:
Company valuation; value of tax shields; present value of the net increases of debt; required return to equity;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-02-12 (All new papers)
- NEP-CFN-2006-02-12 (Corporate Finance)
- NEP-FIN-2006-02-12 (Finance)
- NEP-FMK-2006-02-12 (Financial Markets)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Fernández , Pablo, 2002.
"The value of tax shields is not equal to the present value of tax shields,"
IESE Research Papers
D/459, IESE Business School.
- Fernandez, Pablo, 2004. "The value of tax shields is NOT equal to the present value of tax shields," Journal of Financial Economics, Elsevier, vol. 73(1), pages 145-165, July.
- Richard S Ruback, 2002. "Capital Cash Flows: A Simple Approach to Valuing Risky Cash Flows," Financial Management, Financial Management Association, vol. 31(2), Summer.
- Cooper, Ian & Nyborg, Kjell G, 2005.
"The Value of Tax Shields IS Equal to the Present Value of Tax Shields,"
CEPR Discussion Papers
5182, C.E.P.R. Discussion Papers.
- Cooper, Ian A. & Nyborg, Kjell G., 2006. "The value of tax shields IS equal to the present value of tax shields," Journal of Financial Economics, Elsevier, vol. 81(1), pages 215-225, July.
- Cooper, Ian A. & Nyborg, Kjell G., 2005. "The value of tax shields IS equal to the present value of tax shields," Discussion Papers 2005/14, Department of Business and Management Science, Norwegian School of Economics.
- Myers, Stewart C, 1974. "Interactions of Corporate Financing and Investment Decisions-Implications for Capital Budgeting," Journal of Finance, American Finance Association, vol. 29(1), pages 1-25, March.
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