Tax-Adjusted Discount Rates with Investor Taxes and Risky Debt

Ian Cooper and Kjell Nyborg

No 6646, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper derives a tax-adjusted discount rate formula with a constant proportion leverage policy, investor taxes, and risky debt. The result depends on an assumption about the treatment of tax losses in default. We identify the assumption that justifies the textbook approach of discounting interest tax shields at the cost of debt. We contrast this with an alternative assumption that leads to the Sick (1990) result that these should be discounted at the riskless rate. These two approaches represent polar cases. Each generates its results by using a different simplifying assumption, and we explain what determines the correct treatment in practice. We also discuss implementation of the valuation procedure using the CAPM.

Keywords: Tax adjusted discount rate; Wacc (search for similar items in EconPapers)
JEL-codes: G12 G31 (search for similar items in EconPapers)
Date: 2008-01
New Economics Papers: this item is included in nep-cfn
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Citations: View citations in EconPapers (26)

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Related works:
Journal Article: Tax‐Adjusted Discount Rates with Investor Taxes and Risky Debt (2008)
Working Paper: Tax-adjusted discount rates with investor taxes and risky debt (2007)
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