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Type | Journal Article |
Scope | Discipline-based scholarship |
Title | Tax-adjusted discount rates with investor taxes and risky debt |
Organization Unit | |
Authors |
|
Item Subtype | Original Work |
Refereed | Yes |
Status | Published in final form |
Language |
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Journal Title | Financial Management |
Publisher | Financial Management Association |
Geographical Reach | international |
ISSN | 0046-3892 |
Volume | 37 |
Number | 2 |
Page Range | 365 - 379 |
Date | 2008 |
Abstract Text | This paper derives a tax-adjusted discount rate formula with a constant proportion leverage policy, investor taxes, and risky debt. The result depends on an assumption about the treatment of taxlosses in default. We identify the assumption that justiftes the textbook approach of discounting interest tax shields at the cost of debt. We contrast this with an alternative assumption that leads to the Sick (1990) result that these should be discounted at the riskless rate. These two approachesrepresent polar cases. Each generates its results by using a different simplifying assumption, and we explain what determines the correct treatment in practice. We also discuss implementation of the valuation procedure using the capital asset pricing model. |
Digital Object Identifier | 10.1111/j.1755-053X.2008.00016.x |
Other Identification Number | merlin-id:6931 |
PDF File | Download from ZORA |
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