Discontinuous Financing Based on Market Values and the Value of Tax Shields

Business Research, DOI 10.1007/s40685-017-0053-z

Posted: 25 Oct 2017

See all articles by Alexander D.F. Lahmann

Alexander D.F. Lahmann

Handelshochschule Leipzig (HHL)

Bernhard Schwetzler

HHL Leipzig Graduate School of Management - Department of Finance

Sven Arnold

HHL Leipzig Graduate School of Management

Date Written: September 27, 2017

Abstract

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 firm's 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 introduce a discontinuous financing policy that refers to the refinancing intervals, i.e., the maturity structure of the firm's debt. By deriving APV valuation and beta unlevering equations that allow for this discontinuous financing policy, we show the MM- and ME-policy to be special cases of the proposed extension. While we document the effect of discontinuous refinancing to be economically significant when leverage is high and refinancing periods are extremely long, our results suggest that for low-levered firms with short refinancing periods traditional continuous refinancing based models (like the Miles/Ezzell model) produce relatively robust value estimates. Combining capital structure and maturity structure choices our model extends the set of feasible financing policies in DCF valuation models.

Keywords: Financing Policies, Tax Shield, APV

JEL Classification: G12, G31, G33

Suggested Citation

Lahmann, Alexander D.F. and Schwetzler, Bernhard and Arnold, Sven, Discontinuous Financing Based on Market Values and the Value of Tax Shields (September 27, 2017). Business Research, DOI 10.1007/s40685-017-0053-z , Available at SSRN: https://ssrn.com/abstract=3043752

Alexander D.F. Lahmann (Contact Author)

Handelshochschule Leipzig (HHL) ( email )

Jahnallee 59
Leipzig, 04109
Germany

Bernhard Schwetzler

HHL Leipzig Graduate School of Management - Department of Finance ( email )

Jahnallee 59
D-04109 Leipzig
Germany
+49-341-9851-685 (Phone)
+49-341-9851-689 (Fax)

Sven Arnold

HHL Leipzig Graduate School of Management ( email )

Jahnallee 59
04019 Leipzig
Germany
+493419851663 (Phone)

HOME PAGE: http://www.hhl.de

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
524
PlumX Metrics