Reply to "The value of tax shields is equal to the present value of tax shields"
In a recent paper, Cooper and Nyborg (2004) argue that the results of Fernández (2004) are wrong because value-additivity is violated and because "Fernández paper comes from mixing the Miles-Ezzell leverage policy with the Miller-Modigliani leverage adjustment." Cooper and Nyborg's paper is thought-provoking and helps a lot in rethinking the value of tax shields. However, their conclusions are not correct because, as will be proven below, the main result of Fernández (2004) is correct for several situations. An evident error of Cooper and Nyborg (2004) is that their formulae (4), (6), (8) and (11), which they attribute to Miles and Ezzell (1980), correspond to Harris and Pringle (1985) and Ruback (2002). In addition, their formulae (3) and (5) are not general: they are valid only for perpetuities without growth. In this paper I also show that the value of tax shields depends only upon the nature of the stochastic process of the net increase of debt.
|Date of creation:||03 Nov 2004|
|Date of revision:|
|Contact details of provider:|| Postal: IESE Business School, Av Pearson 21, 08034 Barcelona, SPAIN|
Web page: http://www.iese.edu/
More information through EDIRC
References listed on IDEAS
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.:
- 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.
- 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.
- 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.
- Miles, James A. & Ezzell, John R., 1980. "The Weighted Average Cost of Capital, Perfect Capital Markets, and Project Life: A Clarification," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 15(03), pages 719-730, September.
- 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.
- 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.
When requesting a correction, please mention this item's handle: RePEc:ebg:iesewp:d-0576. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Noelia Romero)
If references are entirely missing, you can add them using this form.