The Value of Tax Shields with a Fixed Book-Value Leverage Ratio
University of Navarra - IESE Business School
October 14, 2005
IESE Business School Working Paper No. 612
The value of tax shields depends only on the nature of the stochastic process of the net increases of debt. The value of tax shields in a world with no leverage cost is the tax rate times the current debt plus the present value of the net increases of debt. We develop valuation formulae for a company that maintains a fixed book-value leverage ratio and show that it is more realistic than to assume, as Miles-Ezzell (1980) do, a fixed market-value leverage ratio. We also show that Miles-Ezzell assume that the increase of debt is proportional to the increase of the free cash flows.
Number of Pages in PDF File: 30
Keywords: Value of tax shields, present value of the net increases of debt, required return to equity, valuation, company valuation
JEL Classification: G12, G31, G32working papers series
Date posted: October 27, 2005
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