Working Paper: NBER ID: w9353
Authors: Mark Grinblatt; Jun Liu
Abstract: This paper studies the valuation of assets with debt tax shields when debt policy is a general time-dependent function of the asset's unlevered cash flows, value, and history. In a continuous-time setting, it shows that the value of a project's debt tax shield satisfies a partial differential equation, which simplifies to an easily solved ordinary differential equation for most plausible debt policies. A large class of cases exhibits closed-form solutions for the value of a levered asset, the value of its tax shield, and the appropriate tax-adjusted cost of capital for discounting unlevered cash flows.
Keywords: No keywords provided
JEL Codes: G0; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| value of a project’s debt tax shield (G32) | unlevered cash flows (G39) |
| value of a project’s debt tax shield (G32) | history of the asset (N20) |
| debt policies (H63) | asset valuations (G32) |
| WACC adjustments (G32) | valuation of cash flows (G19) |