Alexander D.F. Lahmann

The Impact of Default on Tax Shield Valuation

Abstract 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.

About Estimating Gains from Diversification and Why Firms Self-Select

This paper aims to shed light on the alleged contradiction between the observed conglomerate discount and a value creating effect of diversification itself. For this reason, we apply endogenous switching regressions on a sample of 51,878 US-firm years recorded over the years 1992-2012 in order to obtain counterfactual firm values of random average firms, firms decided to diversify and firms that refrained from this choice. For all of them, we find a beneficial effect of diversification. Disembarking from this outcome, we are able to answer why eventually only firms with negative selection quality choose to diversify.

(Re-)Financing Policies and the Value of Debt-Related Tax Shields

The tax shield as present value of debt-related tax savings plays an important role in firm valuation. Driving the risk of future debt levels, the firms strategy to adjust the absolute debt level to future changes of the firm value, labeled as (re-) financing policy, affects the value of tax shields. Standard discounted cash flow (DCF) models offer two simplified (re-) financing policies originally introduced by Modigliani and Miller (MM) as well as Miles and Ezzell (ME). In this paper we show that both policies are special and polar cases of a general model of financing policies referring to the firms choice of debt refinancing intervals. We derive general valuation and cost of capital equations allowing flexibly incorporating any refinancing sequence. By combining capital structure and maturity structure choices our model extends the set of feasible financing policies in DCF valuation models.

Tax Shield, Bankruptcy and Interest Ceiling

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 investigate 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.