The value of tax shields with a fixed book-value leverage ratio
The value of tax shields depends only on the nature of the stochastic process 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 develop valuation formulae for a company that maintains a fixed book-value leverage ratio and show that it is more realistic than to assume, as Miles-Ezzell (1980) do, a fixed market-value leverage ratio. We also show that Miles-Ezzell assume that the increase of debt is proportional to the increase of the free cash flows.
|Date of creation:||15 Oct 2005|
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- 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.
- 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.
- 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.
- 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.
- Richard S Ruback, 2002. "Capital Cash Flows: A Simple Approach to Valuing Risky Cash Flows," Financial Management, Financial Management Association, vol. 31(2), Summer.
- Fieten, Paul & Kruschwitz, Lutz & Laitenberger, Jorg & Loffler, Andreas & Tham, Joseph & Velez-Pareja, Ignacio & Wonder, Nicholas, 2005. "Comment on "The value of tax shields is NOT equal to the present value of tax shields"," The Quarterly Review of Economics and Finance, Elsevier, vol. 45(1), pages 184-187, February.
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