Valuation of the Interest Ceiling Rule (German)

Abstract:     
The German reform on taxation 2008 introduced a restriction of the deductibility of interest expenses to a ceiling of 30% of the EBITDA. This paper shows that the plain probability of reaching this ceiling depresses the value of the tax shield by an option that has a path dependent and recursive nature. The problem is solved in two ways. First the value of the tax shield is calculated by simulation under consideration of the recursive interest carry-forward (Zinsvortrag). Second a model is developed where the problem is treated as a spread option and an analytic formula is derived.

Note: Downloadable document is in German.

Keywords: Zinsschranke, Tax Shield, DCF, Unternehmensbesteuerung, Adjusted Present Value, APV

JEL Classification: G32, C15, H25, H32

working papers series