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Debt Policy, Corporate Taxes, and Discount Rates

Mark Grinblatt and Jun Liu

University of California at Los Angeles, Anderson Graduate School of Management from Anderson Graduate School of Management, UCLA

Abstract: This paper studies the valuation of assets with debt tax shields when debt policy is a general time-dependent function of the asset’s unlevered cash flows, value, and history. In a continuous-time setting, it shows that the value of a project’s debt tax shield satisfies a partial di�erential equation, which simplifies to an easily solved ordinary di�erential equation for most plausible debt policies. A large class of cases exhibits closed-form solutions for the value of a levered asset, the value of its tax shield, and the appropriate cost of capital for discounting unlevered cash flows so as to account for the value of the tax shield.

Date: 2002-11-06
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Related works:
Journal Article: Debt policy, corporate taxes, and discount rates (2008) Downloads
Working Paper: Debt Policy, Corporate Taxes, and Discount Rates (2002) Downloads
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