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IESE Research Papers,
IESE Business School

No D/579: Reply to "Comment on the value of tax shields is NOT equal to the present value of tax shields"

Pablo Fernandez ()
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Pablo Fernandez: IESE Business School, Postal: Research Division, Av Pearson 21, 08034 Barcelona, SPAIN

Abstract: The Comment is thought provoking and helps a lot in rethinking the value of tax shields. However, the conclusion of Fieten, Kruschwitz, Laitenberger, Löffler, Tham, Vélez-Pareja and Wonder (2005) is not correct because, as will be proven below, the main result of Fernández (2004) is correct for several situations. Equation (16a) shows that the value of tax shields depends only upon the nature of the stochastic process of the net increase of debt.

Keywords: Value of tax shields; present value of the net increases of debt

JEL-codes: G12; G31; G32

8 pages, January 15, 2005

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