Debt Policy, Corporate Taxes, and Discount Rates
35 Pages Posted: 21 Nov 2002 Last revised: 24 Jul 2022
There are 2 versions of this paper
Debt Policy, Corporate Taxes, and Discount Rates
Date Written: November 2002
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.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Capital Cash Flows: A Simple Approach to Valuing Risky Cash Flows
-
Debt Policy, Corporate Taxes, and Discount Rates
By Mark Grinblatt and Jun Liu
-
Unconventional Wisdom on Psi, the Appropriate Discount Rate for the Tax Shield
By Joseph Tham and Nicholas X. Wonder
-
The Non-Conventional Wacc with Risky Debt and Risky Tax Shield
By Joseph Tham and Nicholas X. Wonder
-
Guide for Forecasting Financial Statements and Financial Valuation of a Business Plan (in Spanish)
-
Three Discount Methods for Valuing Projects and the Required Return on Equity
-
WACC: definición, interpretaciones equivocadas y errores (WACC: Definition and Errors)