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Debt Policy, Corporate Taxes, and Discount Rates
Mark Grinblatt
University of California, Los Angeles (UCLA) - Finance Area; Yale University - International Center for Finance; National Bureau of Economic Research (NBER)
Jun Liu
University of California, San Diego (UCSD) - Rady School of Management
November 2002
NBER Working Paper No. w9353
Abstract:
This paper studies the valuation of assets with debt tax shields when debt policy is a general time-dependent function of the asset's unlevered cash flows, value, and history. In a continuous-time setting, it shows that the value of a project's debt tax shield satisfies a partial differential equation, which simplifies to an easily solved ordinary differential equation for most plausible debt policies. A large class of cases exhibits closed-form solutions for the value of a levered asset, the value of its tax shield, and the appropriate tax-adjusted cost of capital for discounting unlevered cash flows.
Number of Pages in PDF File: 35
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Date posted: November 21, 2002
Suggested CitationGrinblatt, Mark and Liu, Jun, Debt Policy, Corporate Taxes, and Discount Rates (November 2002). NBER Working Paper No. w9353. Available at SSRN: http://ssrn.com/abstract=353763
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