Fernandez (2004b) argues that the present value effect of the tax saving on debt cannot be calculated as simply the present value of the tax shields associated with interest. This contradicts standard results in the literature. It implies that, even though the capital market is complete,...

This paper derives tax-adjusted discount rate formulas with a constant proportion leverage policy, investor taxes, and risky debt. The result depends on an assumption about the treatment of tax losses in default. We identify the assumption that justifies the textbook approach of discounting...

Subject Areas: Corporate finance, taxes, cost of capital, capital expenditure, valuation analysisThis note summarises the relationships between values, rates of return and betas that depend on taxes. It extends the standard analysis to include the effect of risky debt. It brings together a...

This paper proposes a practical way of estimating the cost of risky debt for use in the cost of capital. The cost of debt is different from both the promised yield and the risk-free rate, which are sometimes used for this purpose, because of the expected probability of default. The Merton (1974)...

In a recent paper, Fernandez (2004) argues that the present value effect of the tax saving on debt cannot be calculated as simply the present value of the tax shields associated with interest. This contradicts standard results in the literature. It implies that, even though the capital market is...

This paper develops and tests a method of extracting expectations about default losses on corporate debt from yield spreads. It is based on calibrating theMerton (1974) model to yield spread, leverage and equity volatility. For rating classes, the approach generates forwardlooking expected...

We examine the changes in betas resulting from international mergers. We find that the beta with respect to the acquirer's home market rises and that with respect to the target's home market falls. This effect is robust with respect to controls for changes in the operations of the companies...

This paper derives a tax-adjusted discount rate formula with a constant proportion leverage policy, investor taxes, and risky debt. The result depends on an assumption about the treatment of tax losses in default. We identify the assumption that justifies the textbook approach of discounting...

Generalizing Cooper-Kaplanis (1994), we estimate implied costs that reconcile international portfolios with InCAPM predictions. Costs depend on home- and host-country characteristics and on interactions; we estimate risk tolerance rather than pre-specifying it; and we control for currency risk,...

We reconsider the costs to international equity investments implied by standard portfolio theory (Cooper and Kaplanis, 1994; Sercu and Vanpée, 2008). Estimated costs are mostly driven by risk estimates, not by asset holdings. For OECD markets, risks are fairly stable and relatively easy to...