Discounted Cash Flow

Discontinuous financing based on market values and the value of tax shields

“…Given a constant debt level, the value of the tax shield is given by 9 As discussed by Sick (1990), Kruschwitz et al (2005), Rapp (2006), Cooper and Nyborg (2008), Molnár and Nyborg (2013), and Krause and Lahmann (2016), the discount rate for tax shield valuation depends on the assumptions on the tax treatment of writing down debt in case of a possible default and on the loss distribution. Kruschwitz et al (2005) assuming interest prioritization and a taxation of a possible cancellation of indebtedness (COD) have shown that the discount rate is equal to r f , i.e., r D ¼ r f (see additionally Cooper and Nyborg (2008), p. 368). Cooper and Nyborg (2008) assuming interest prioritization and possible COD are exempted from taxation have shown r D to be equal to the contractually fixed promised yield r c .…”

Taxes and the choice between risky and risk-free debt: on the neutrality of credit default taxation

“…They come to the conclusion that disregarding the default risk can lead to a considerable bias in the value of a corporation. 1 In contrast, Kruschwitz et al (2005) demonstrate that under special conditions default risks can be ignored even after taxation. With our model, we tie in with this discussion.…”

“…Our aim is to generalize the characteristics of credit default neutral tax systems that enable the valuation of corporations under the assumption of risk-free debt but nevertheless without a valuation bias. This enables us to identify and explain the differences between the approaches of Homburg et al (2004), Rapp (2006) and Kruschwitz et al (2005).…”

“…21 See Bringewat and Waza (2004), p. 214;Dziadkowski and Treisch (1995), p. 333; Kroschel andWellisch (1998), p. 1662. 22 See Kruschwitz et al (2005). parameters that determine the default taxation (b and w) only has an impact on the tax payments in those states in which credit default occurs. In order to assure that the creditor's after-tax cash flows remain the same as in the system with tax distribution preservation an increase in creditor taxes T Ds has to be compensated by an equivalent increase in the creditor's pre-tax cash flows D s [see Eqs.…”

“… See Bond and Devereux (2003), p. 1292, for possible justifications of this assumption.6 SeeKruschwitz et al (2005), p. 223f., for a discussion of this assumption.…”