Valuing companies with a fixed book-value leverage ratio

Pablo Fernandez

No D/614, IESE Research Papers from IESE Business School

Abstract: We develop valuation formulae for a company that maintains a fixed book-value leverage ratio and claim that it is more realistic than to assume, as Miles-Ezzell (1980) do, a fixed market-value leverage ratio. The value of tax shields depends only on the present value 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. We also show that the appropriate discount rates for the equity cash flows and for the expected value of the equity are different.

Keywords: Company valuation; value of tax shields; present value of the net increases of debt; required return to equity (search for similar items in EconPapers)
JEL-codes: G12 G31 G32 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2005-11-03
New Economics Papers: this item is included in nep-cfn, nep-fin and nep-fmk
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Persistent link: https://EconPapers.repec.org/RePEc:ebg:iesewp:d-0614

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