Tax Shields in an Lbo
Freie University Working Paper No. 2000/02
12 Pages Posted: 3 Apr 2000
Date Written: January 2000
Abstract
In a typical LBO debt is reduced by a substantial part of the firm's cash flow. The object of the paper is to analyze whether the tax advantage of this debt transaction plan can be evaluated using the WACC or the APV method. It turns out that none of them is appropriate, and we will provide a different approach using the theory of derivatives to value the tax shield. We compare our approach with WACC and APV and the finding is that the cost of debt are always less than the riskless rate.
JEL Classification: G32
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Separation of Ownership and Control
By Eugene F. Fama and Michael C. Jensen
-
Performance Pay and Top Management Incentives
By Kevin J. Murphy and Michael C. Jensen
-
Agency Problems and Residual Claims
By Eugene F. Fama and Michael C. Jensen
-
Rights and Production Functions: An Application to Labor Managed Firms and Codetermination
-
Relative Performance Evaluation for Chief Executive Officers
By Robert S. Gibbons and Kevin J. Murphy
-
CEO Incentives: It's Not How Much You Pay, But How
By Michael C. Jensen and Kevin J. Murphy
-
Organizational Forms and Investment Decisions
By Eugene F. Fama and Michael C. Jensen
-
Effects of Lbos on Tax Revenues of the U.S. Treasury
By Michael C. Jensen, Steven N. Kaplan, ...