The Value of Tax Shields Depends Only on the Stochastic Process of the Net Increase of Debt

10 Pages Posted: 4 Aug 2005

Date Written: July 20, 2005

Abstract

The value of tax shields depends only on the nature of the stochastic process of the net increase of debt. The value of tax shields in a world with no leverage cost is the tax rate times the current debt, plus the tax rate times the present value of the net increases of debt. By applying this formula to specific situations, we show that Myers (1974) should be used when the company has a preset amount of debt, Fernández (2004) when the company maintains a fixed book value leverage ratio, and Miles-Ezzell (1980) when the company maintains a fixed market value leverage ratio.

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, The Value of Tax Shields Depends Only on the Stochastic Process of the Net Increase of Debt (July 20, 2005). Available at SSRN: https://ssrn.com/abstract=765289 or http://dx.doi.org/10.2139/ssrn.765289

Pablo Fernandez (Contact Author)

IESE Business School ( email )

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

HOME PAGE: http://web.iese.edu/PabloFernandez/

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