Valuing the Government's Tax Claim on Risky Corporate Assets

Saman Majd and Stewart C. Myers

No 1553, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper explores the effects of tax asymmetries on the value of risky capital investments made by corporations.The government's claim on the firm is shown to be equivalent to a portfolio of options on the firm's revenues. The tax law's provisions for carrying tax losses forward and backward are introduced, necessitating a numerical solution for the value ofthe government's claim. The results show that asymmetric taxation of operating gains and losses can significantly affect the after-tax net present value of corporate investment opportunities.

Date: 1985-02
Note: ME PE
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