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Comment on 'the Value of Tax Shields is Not Equal to the Present Value of Tax Shields', Including an Arbitrage Opportunity

The Quarterly Review of Economics and Finance, Vol. 45, No. 1, pp. 188-192, February 2005

8 Pages Posted: 31 Dec 2003 Last revised: 1 Apr 2009

Nicholas X. Wonder

Western Washington University - College of Business & Economics

Paul Fieten

Ernst & Young, The Netherlands

Lutz Kruschwitz

Free University of Berlin (FUB) - Department of Business and Economics

Jörg Laitenberger

University of Hannover - Economics and Business Administration Area

Andreas Loeffler

Freie Universität Berlin

Joseph Tham

Duke University - Duke Center for International Development in the Sanford School of Public Policy

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation

Date Written: December 22, 2003

Abstract

In a forthcoming paper, Fernandez (2002) claims to derive a formula for the valuation of debt tax shields for firms with cash flows that grow perpetually at a constant rate. We show that his formula is incorrect and provide an example where his valuation would admit arbitrage.

Keywords: Present value of tax shield, perpetuities

JEL Classification: G31, G32, H43

Suggested Citation

Wonder, Nicholas X. and Fieten, Paul and Kruschwitz, Lutz and Laitenberger, Jörg and Loeffler, Andreas and Tham, Joseph and Velez-Pareja, Ignacio, Comment on 'the Value of Tax Shields is Not Equal to the Present Value of Tax Shields', Including an Arbitrage Opportunity (December 22, 2003). The Quarterly Review of Economics and Finance, Vol. 45, No. 1, pp. 188-192, February 2005. Available at SSRN: https://ssrn.com/abstract=482342 or http://dx.doi.org/10.2139/ssrn.482342

Nicholas X. Wonder (Contact Author)

Western Washington University - College of Business & Economics ( email )

Department of Finance and Marketing
Bellingham, WA 98225-9071

Paul Fieten

Ernst & Young, The Netherlands ( email )

Postbus 488
Rotterdam, 3000 AL
Netherlands

Lutz Kruschwitz

Free University of Berlin (FUB) - Department of Business and Economics ( email )

Boltzmannstrasse 20
D-14195 Berlin, 14195
Germany
+49 30 838-54631 (Phone)
+49 30 838-54468 (Fax)

Jörg Laitenberger

University of Hannover - Economics and Business Administration Area ( email )

Koenigsworther Platz 1
30167 Hannover
Germany
+49-511-7624668 (Phone)
+49-511-7624670 (Fax)

Andreas Loeffler

Freie Universität Berlin ( email )

Boltzmannstr. 20
Berlin, 14195
Germany

HOME PAGE: http://www.andreasloeffler.de

Joseph Tham

Duke University - Duke Center for International Development in the Sanford School of Public Policy ( email )

Box 90312
302, Towerview Dr, Rubenstein Hall, Room 272
Durham, NC 27708
United States
919-613-9234 (Phone)
919-681-0831 (Fax)

HOME PAGE: http://fds.duke.edu/db/Sanford/faculty/thamjx

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation ( email )

Ave Miramar # 18-93 Apt 6A
Cartagena
Colombia
+573112333074 (Phone)

HOME PAGE: http://cashflow88.com/decisiones/decisiones.html

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