Reply to 'the Value of Tax Shields is Equal to the Present Value of Tax Shields'

16 Pages Posted: 1 Nov 2004

Date Written: October 28, 2004


In a recent paper, Cooper and Nyborg (2004) argue that the results of Fernandez (2004) are wrong because value-additivity is violated and because "Fernandez paper comes from mixing the Miles-Ezzell leverage policy with the Miller-Modigliani leverage adjustment."

Cooper and Nyborg paper is thought provoking and helps a lot in rethinking the value of tax shields. However, their conclusions are not correct because, as will be proven below, the main result of Fernandez (2004) is correct for several situations.

An evident error of Cooper and Nyborg (2004) is that their formulae (4), (6), (8) and (11), that they attribute to Miles and Ezzell (1980), correspond to Harris and Pringle (1985) and Ruback (2002). In addition, their formulae (3) and (5) are not general: they are valid only for perpetuities without growth.

In this paper I also show that the value of tax shields depends only upon the nature of the stochastic process of the net increase of debt.

Keywords: Value of tax shields, present value of the net increases of debt, required return to equity

JEL Classification: G12, G31, G32

Suggested Citation

Fernandez, Pablo, Reply to 'the Value of Tax Shields is Equal to the Present Value of Tax Shields' (October 28, 2004). Available at SSRN: or

Pablo Fernandez (Contact Author)

IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
+34 91 357 0809 (Phone)
+34 91 357 2913 (Fax)


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