The Value of Tax Shields Depends Only on the Net Increases of Debt

IESE Business School Working Paper No. 613

30 Pages Posted: 27 Oct 2005

See all articles by Pablo Fernandez

Pablo Fernandez

University of Navarra - IESE Business School

Date Written: October 2005

Abstract

The value of tax shields depends only on the nature of the stochastic process of the net increases of debt. The value of tax shields in a world with no leverage cost is the tax rate times the current debt plus the present value of the net increases of debt. By applying this formula to specific situations, we show that Modigliani-Miller (1963) 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, valuation

JEL Classification: G12, G31, G32

Suggested Citation

Fernandez, Pablo, The Value of Tax Shields Depends Only on the Net Increases of Debt (October 2005). IESE Business School Working Paper No. 613. Available at SSRN: https://ssrn.com/abstract=827351 or http://dx.doi.org/10.2139/ssrn.827351

Pablo Fernandez (Contact Author)

University of Navarra - IESE Business School ( email )

Camino del Cerro del Aguila 3
28023 Madrid
Spain
+34 91 357 0809 (Phone)
+34 91 357 2913 (Fax)

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

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