Post by Sapphire Capital on Oct 10, 2008 21:16:53 GMT 4
Tax-Adjusted Discount Rates with Investor Taxes and Risky Debt
Ian A. Cooper
London Business School
Kjell G. Nyborg
Norwegian School of Economics and Business Administration; Centre for Economic Policy Research (CEPR)
January 2008
CEPR Discussion Paper No. DP6646
Abstract:
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 tax losses in default. We identify the assumption that justifies 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 approaches represent 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 CAPM.
papers.ssrn.com/sol3/papers.cfm?abstract_id=1140575
Ian A. Cooper
London Business School
Kjell G. Nyborg
Norwegian School of Economics and Business Administration; Centre for Economic Policy Research (CEPR)
January 2008
CEPR Discussion Paper No. DP6646
Abstract:
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 tax losses in default. We identify the assumption that justifies 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 approaches represent 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 CAPM.
papers.ssrn.com/sol3/papers.cfm?abstract_id=1140575