Abstract

http://ssrn.com/abstract=790844
 
 

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The Value of Tax Shields IS Equal to the Present Value of Tax Shields


Ian A. Cooper


London Business School

Kjell G. Nyborg


University of Zurich - Department of Banking and Finance; Centre for Economic Policy Research (CEPR); Swiss Finance Institute

August 2005

CEPR Discussion Paper No. 5182

Abstract:     
In a recent paper, Fernandez (2004a) argues that the present value effect of the tax saving on debt cannot be calculated as simply the present value of the tax shields associated with interest. This contradicts standard results in the literature. It implies that, even though the capital market is complete, value-additivity is violated. As a consequence, adjusted present value formulae of a standard sort cannot be used. Also, it implies that the value of the tax saving differs from conventional estimates by a considerable amount. We reconcile Fernandez's results with standard valuation formulae for the tax saving from debt. We show that, as one would expect, the value of the debt tax saving IS the present value of the tax savings from interest. The apparent violation of value-additivity in the Fernandez paper comes from mixing the Miles-Ezzell and Miller-Modigliani leverage policies.

Number of Pages in PDF File: 17

Keywords: Tax shields, leverage, adjusted present value

JEL Classification: G31, G32

working papers series


Date posted: August 25, 2005  

Suggested Citation

Cooper, Ian A. and Nyborg, Kjell G., The Value of Tax Shields IS Equal to the Present Value of Tax Shields (August 2005). CEPR Discussion Paper No. 5182. Available at SSRN: http://ssrn.com/abstract=790844

Contact Information

Ian Anthony Cooper (Contact Author)
London Business School ( email )
Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
+44 171 262 5050 (Phone)
Kjell G. Nyborg
University of Zurich - Department of Banking and Finance ( email )
Plattenstrasse 14
Zürich, 8032
Switzerland
+41 (0)44 634 2980 (Phone)
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Swiss Finance Institute ( email )
c/o University of Geneve
40, Bd du Pont-d'Arve
Geneva, 1211
Switzerland

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