Reply to Comment on the Value of Tax Shields is NOT Equal to the Present Value of Tax Shields
University of Navarra - IESE Business School
June 22, 2004
The Comment is thought provoking and helps a lot in rethinking the value of tax shields. However, the conclusion of Fieten, Kruschwitz, Laitenberger, Loffler, Tham, Velez-Pareja and Wonder (2005) is not correct because, as will be proven below, the main result of Fernandez (2004) is correct for several situations.
Equation (16a) shows that the value of tax shields depends only upon the nature of the stochastic process of the net increase of debt.
Number of Pages in PDF File: 5
Keywords: Value of tax shields, Required return to equity, leverage cost, unlevered beta, levered beta
JEL Classification: G12, G31, G32
Date posted: January 11, 2005
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