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Debt Policy, Corporate Taxes, and Discount Rates

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  • Mark Grinblatt
  • Jun Liu

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.

Suggested Citation

  • Mark Grinblatt & Jun Liu, 2002. "Debt Policy, Corporate Taxes, and Discount Rates," NBER Working Papers 9353, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:9353
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    Cited by:

    1. Dirk Beyer, 2018. "A matrix approach to valuation and performance measurement based on accounting information considering different financing policies," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 29(1), pages 37-61, March.
    2. Marc Steffen Rapp, 2006. "Die arbitragefreie Adjustierung von Diskontierungssätzen bei einfacher Gewinnsteuer," Schmalenbach Journal of Business Research, Springer, vol. 58(6), pages 771-806, September.
    3. Cooper, Ian A. & Nyborg, Kjell G., 2006. "The value of tax shields IS equal to the present value of tax shields," Journal of Financial Economics, Elsevier, vol. 81(1), pages 215-225, July.
    4. Ralf Diedrich & Stefan Dierkes & Hans-Christian Gröger, 2022. "A note on the cost of capital with fixed payout ratios," Review of Quantitative Finance and Accounting, Springer, vol. 59(4), pages 1559-1575, November.
    5. Rainer Baule, 2019. "The cost of debt capital revisited," Business Research, Springer;German Academic Association for Business Research, vol. 12(2), pages 721-753, December.
    6. Robert Couch & Michael Dothan & Wei Wu, 2012. "Interest Tax Shields: A Barrier Options Approach," Review of Quantitative Finance and Accounting, Springer, vol. 39(1), pages 123-146, July.
    7. Stefan Dierkes & Imke Maeyer, 2022. "Terminal value calculation with discontinuous financing and debt categories," Journal of Business Economics, Springer, vol. 92(7), pages 1207-1248, September.
    8. Lucia MICHALKOVA & Tomas KLIESTIK, 2019. "The Role Of Risk In The Valuation Of Tax Shield," Proceedings of the INTERNATIONAL MANAGEMENT CONFERENCE, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 13(1), pages 218-233, November.
    9. Lin, Hsuan-Chu & Chou, Ting-Kai & Wang, Wen-Gine, 2012. "Capital structure and executive compensation contract design: A theoretical and empirical analysis," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 209-224.
    10. Sven Arnold & Alexander Lahmann & Bernhard Schwetzler, 2018. "Discontinuous financing based on market values and the value of tax shields," Business Research, Springer;German Academic Association for Business Research, vol. 11(1), pages 149-171, February.
    11. Andrea Gamba & Gordon A. Sick & Carmen Aranda León, 2008. "Investment under Uncertainty, Debt and Taxes," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 37(1), pages 31-58, February.
    12. Stefan Dierkes & Imke de Maeyer, 2020. "Valuation with mixed financing strategies," Business Research, Springer;German Academic Association for Business Research, vol. 13(3), pages 1317-1341, November.

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    JEL classification:

    • G0 - Financial Economics - - General
    • G1 - Financial Economics - - General Financial Markets

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