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
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: Suggested Citation