The Impact of Default on Tax Shield Valuation
- In this paper we develop a model to value debt related tax savings and associated yield rates for debt in a setting where future cash flows are uncertain and follow a stochastic diffusion process. By explicitly modeling a default trigger we find that tax shield values in standard Discounted Cash Flow (DCF) valuation formulas are too high as they do not correctly incorporate the risk of default. Furthermore, we are able to endogenously derive risk-adjusted yield rates, while keeping the overall simple and tractable structure of the DCF approach.
| Document Type: | Article |
|---|---|
| Language: | English |
| Author: | Alexander LahmannORCiD, Sven Arnold, Philipp Gmehling |
| Chairs and Professorships: | Chair of Economics and Information Systems |
| Chair of Financial Management | |
| Chair of Mergers & Acquisitions | |
| DOI: | https://doi.org/10.1515/jbvela-2016-005 |
| Parent Title (English): | Journal of Business Valuation and Economic Loss Analysis |
| Volume: | 12 |
| Issue: | 1 |
| Year of Completion: | 2016 |
| First Page: | 41 |
| Last Page: | 62 |
| Year of first Publication: | 2017 |
| Tag: | Default; Discounted Cash Flow; Firm Valuation; Tax Shield; Yield Rates |
| Note: | In: Journal of Business Valuation and Economic Loss Analysis, (2016), DOI: 10.1515/jbvela-2016-0005 |
| Content Focus: | Academic Audience |
| Peer Reviewed: | Yes |
| Rankings: | VHB Ranking / C |