De and re-levering betas with risky debt

Marko Volker Krause ()
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Marko Volker Krause: Capco-The Capital Markets Company GmbH

Business Research, 2019, vol. 12, issue 2, No 12, 703-720

Abstract: Abstract De- and re-levering betas is important to obtain discount rates for assets that are not publicly traded. A de- and re-levering procedure is around for the case of risk-free debt. The procedure for risky debt is much less clear even under very simplifying assumptions. In this paper, I concretize and extend the procedure for de- and re-levering of betas for companies with risky debt. I derive procedures for different assumptions on the taxation of a cancellation of debt (COD) and for different assumptions regarding the distribution of losses on interest and principal payments. With a tax on the COD I obtain known results. However, without taxes on a COD, the distribution of losses on interest and principal payments matters and equations differ markedly for different assumptions on the assignment of losses to interest and principal payments. Furthermore, using a procedure that does not fit the COD treatment is likely to lead to substantial deviations for de- and re-levered betas from their correct values.

Keywords: Default risk; Tax treatment of default; Betas; Leverage (search for similar items in EconPapers)
JEL-codes: G12 G31 G32 G33 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s40685-018-0066-2

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