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
Date Written: December 22, 2003
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: Suggested Citation