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http://ssrn.com/abstract=353763
 
 

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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 Citation

Grinblatt, 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

Contact Information

Mark Grinblatt (Contact Author)
University of California, Los Angeles (UCLA) - Finance Area ( email )
Los Angeles, CA 90095-1481
United States
310-825-1098 (Phone)
310-206-5455 (Fax)
Yale University - International Center for Finance
Box 208200
New Haven, CT 06520-8200
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Jun Liu
University of California, San Diego (UCSD) - Rady School of Management ( email )
9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States
858.534.2022 (Phone)
5858.534.0745 (Fax)
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