Christian Arnold, Alexander Lahmann, Bernhard Schwetzler

• This paper analyses the tax shield under realistic assumptions: no immediate refund and potential corporate bankruptcy for different financing policies. Assuming a German setting, we additionally iestigate the impact of the interest ceiling (“Zinsschranke”) introduced by the German Tax Reform Act 2008 on the tax shield value. Our analysis rests on an option pricing model in a single period setting and on a Monte Carlo Simulation model in a multiperiod setting. We find the introduction of possible bankruptcy to have a significant impact on the tax shield; in contrast the effect of the interest ceiling is negligible.