Debt Policy, Corporate Taxes, and Discount Rates / Mark Grinblatt, Jun Liu.

Format:

Book

Author/Creator:

Grinblatt, Mark.

Contributor:

National Bureau of Economic Research.

Liu, Jun.

Series:

Working Paper Series (National Bureau of Economic Research) no. w9353.

NBER working paper series no. w9353

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2002.

Summary:

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.

Notes:

Print version record

November 2002.