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Review of Quantitative Finance and Accounting

Erschienen in:

01.07.2012 | Original Research

Interest Tax Shields: A Barrier Options Approach

verfasst von: Robert Couch, Michael Dothan, Wei Wu

Erschienen in: Review of Quantitative Finance and Accounting | Ausgabe 1/2012

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Abstract

There is a link between barrier options and tax shields of interest expense. We combine this link with a traditional valuation approach, to present practical valuation formulas for interest tax shields in three debt scenarios with risk of default: (1) constant debt, (2) delayed debt, and (3) debt refinancing. In all cases, default and refinancing are contingent on the random evolution of the income of the firm. For each scenario, we work out sensitivity analysis of the value of tax shields with respect to income, growth, systematic and business risk, risk-free interest rate, interest coverage ratio covenant, and the firm’s refinancing strategy.

Vorheriger Artikel New empirical evidence on the investment success of momentum strategies based on relative stock prices

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Titel: Interest Tax Shields: A Barrier Options Approach
verfasst von: Robert Couch
Michael Dothan
Wei Wu
Publikationsdatum: 01.07.2012
Verlag: Springer US
Erschienen in: Review of Quantitative Finance and Accounting / Ausgabe 1/2012
Print ISSN: 0924-865X
Elektronische ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-012-0282-3

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