Debt Policy, Corporate Taxes, and Discount Rates

Grinblatt, Mark; Liu, Jun

Debt Policy, Corporate Taxes, and Discount Rates

No 9353, NBER Working Papers from National Bureau of Economic Research, Inc

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 differential equation, which simplifies to an easily solved ordinary differential 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 tax-adjusted cost of capital for discounting unlevered cash flows.

JEL-codes: G0 G1 (search for similar items in EconPapers)
Date: 2002-11
New Economics Papers: this item is included in nep-cfn
Note: AP
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Citations: View citations in EconPapers (1)

Published as Grinblatt, Mark & Liu, Jun, 2008. "Debt policy, corporate taxes, and discount rates," Journal of Economic Theory, Elsevier, vol. 141(1), pages 225-254, July.

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Journal Article: Debt policy, corporate taxes, and discount rates (2008)
Working Paper: Debt Policy, Corporate Taxes, and Discount Rates (2002)
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