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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.

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Document Type:Article
Author:Alexander LahmannORCiD, Sven Arnold, Philipp Gmehling
Chairs and Professorships:Chair of Economics and Information Systems
Chair of Financial Management
Chair of Mergers & Acquisitions
Parent Title (English):Journal of Business Valuation and Economic Loss Analysis
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
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