Value of tax shields and the risk of the net increase of debt, The. Year 2004

Pablo Fernandez

No D/544, IESE Research Papers from IESE Business School

Abstract: The value of tax shields depends on the nature of the stochastic process of the net increase of debt; it does not depend on the nature of the stochastic process of the free cash flow. The value of tax shields in a world with no leverage cost is the tax rate times the debt, plus the tax rate times the present value of the net increases of debt. This expression is the difference between the present values of two different cash flows, each with its own risk: the present value of taxes for the unlevered company and the present value of taxes for the levered company. For perpetual debt, the value of tax shields is the debt times the tax rate. When the company is expected to repay the current debt without issuing new debt, the value of tax shields is the present value of the interest times the tax rate, discounted at the required return to debt.

Keywords: value tax shields; present value net increases debt; required return equity; leverage cost; unlevered beta; levered beta (search for similar items in EconPapers)
JEL-codes: G12 G31 G32 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2004-03-04
New Economics Papers: this item is included in nep-cfn
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