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The Impact of Default on Tax Shield Valuation

Author

Listed:
  • Lahmann Alexander

    (Leipzig Graduate School of Management – Junior Professorship for M&A in SME, Leipzig, Germany)

  • Arnold Sven

    (Ernst & Young GmbH – Transaction Advisory Service, Hamburg, Germany)

  • Gmehling Philipp

    (Department of Economics & Regulation, Leipzig Graduate School of Management, Jahnallee 59, Leipzig04109, Germany)

Abstract

In this paper we develop a model to value debt related tax savings and associated yield rates for debt in a setting where future cash flows are uncertain and follow a stochastic diffusion process. By explicitly modeling a default trigger we find that tax shield values in standard Discounted Cash Flow (DCF) valuation formulas are too high as they do not correctly incorporate the risk of default. Furthermore, we are able to endogenously derive risk-adjusted yield rates, while keeping the overall simple and tractable structure of the DCF approach.

Suggested Citation

  • Lahmann Alexander & Arnold Sven & Gmehling Philipp, 2017. "The Impact of Default on Tax Shield Valuation," Journal of Business Valuation and Economic Loss Analysis, De Gruyter, vol. 12(1), pages 41-62, February.
    • Handle: RePEc:bpj:jbvela:v:12:y:2017:i:1:p:41-62:n:6
    DOI: 10.1515/jbvela-2016-0005
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    References listed on IDEAS

    as
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