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  • 2008 Summer: Volume 6, Issue 1
  • An Option Valuation Analysis of the Value of Tax Shields for Risky Debt

    • Torn W. Miller

    Title:

    An Option Valuation Analysis of the Value of Tax Shields for Risky Debt

    Author(s):

    Torn W. Miller

    Publication Date:

    2008

    Journal Title:

    The Journal of Finance Issues

    Volume Number:

    6

    Issue Number:

    1

    Abstract:

    Several different models for the appropriate di scount rate for the tax shi elds and the present value of the tax shields resulting from the use of debt have appeared in the finance literature. This research uses an option valuation fram ework to develop models for the appropriate discount rate for the ri sky tax shields, the present value of the tax shields, and the probability of default resulting from the use of debt. Relationships between cash flows and their present values for finns with constant, perpetual growth are developed. The reinvestment required to support the constant, perpetual growth is incorporated in the expressions for the relationships between cash flows and present values. This analysis using option valuation theory and relation ships between cash flows and their present values provides a framework for unifying the major apparently di ss imilar results for the appropri ate discount ratc for the tax shields and the present value of the tax shields that have appeared in the fi nance litera ture.

    First Page:

    41

    Last Page:

    61

    Total Pages:

    20