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Reply to "Comment on the value of tax shields is NOT equal to the present value of tax shields"

  • Fernandez, Pablo

The Comment is thought provoking and helps a lot in rethinking the value of tax shields. However, the conclusion of Fieten, Kruschwitz, Laitenberger, Löffler, Tham, Vélez-Pareja and Wonder (2005) is not correct because, as will be proven below, the main result of Fernández (2004) is correct for several situations. Equation (16a) shows that the value of tax shields depends only upon the nature of the stochastic process of the net increase of debt.

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File URL: http://www.sciencedirect.com/science/article/B6W5X-4DVC058-4/2/315aa2b3c13abda982ff1b5eab502caa
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Article provided by Elsevier in its journal The Quarterly Review of Economics and Finance.

Volume (Year): 45 (2005)
Issue (Month): 1 (February)
Pages: 188-192

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Handle: RePEc:eee:quaeco:v:45:y:2005:i:1:p:188-192
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620167

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  1. Robert A. Taggart & Jr., 1991. "Consistent valuation and Cost of Capital Expressions With Corporate and Personal Taxes," Financial Management, Financial Management Association, vol. 20(3), Fall.
  2. 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.
  3. Gordon A. Sick, 1990. "Tax-Adjusted Discount Rates," Management Science, INFORMS, vol. 36(12), pages 1432-1450, December.
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