We analyze corporate financial policies in leveraged buyouts (LBOs) in the presence of default risk. Our model captures the LBO-specific stepwise debt reduction, either with predetermined or cash-flow dependent (cash sweep) principal payments, and thus allows for dynamic redemption. These...

Koziol (2014) derives a simple adjusted WACC equation for firm valuation that takes default probability, possible loss of future tax savings, and the potential costs of financial distress into account. In this note we show that the derivation of the adjusted formula rests on an assumption that,...

Rating affects corporate credit costs and leverage choices. Therefore, we develop a corporate valuation model where the choice of leverage is consistent with the implied cost of debt of the rating class. We explicitly model the trigger, the consequences, and the analytical probability of...

The internal rate of return (IRR) is still a widespread criterion for investment decisions, although many pitfalls are well known. This paper provides evidence for another, more fundamental, dark side of IRR: Based on a dynamic model of optimal capital structure with endogenous bankruptcy...

This paper aims to shed light on the alleged contradiction between the observed conglomerate discount and a value creating effect of diversification itself. For this reason, we apply endogenous switching regressions on a sample of 51,878 US-firm years recorded over the years 1992-2012 in order...

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...

In this paper we address the magnitude of debt-related tax shields employing a proprietary data set of 56 German leveraged buyouts (LBOs) completed between 1997 and 2011. In particular we examine the relevance and performance contribution of tax shields under different financing policies, and...

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...

This paper analyses the tax shield under realistic assumptions: no immediate refund and potential corporate bankruptcy for different financing policies. Assuming a German setting, we additionally investigate the impact of the interest ceiling (“Zinsschranke”) introduced by the German Tax...