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 addresses an issue central to the estimaiton of discount rates for capital budgeting: should the geometric mean or arithmetic mean of past data be used when estimating the discount rate? The use of the arithmetic mean ignores estimation error and serial correlation in returns....

Evidence suggests that interntaional capital markets are neither fully integrated nor completely semented. There is, however, currently no general method available for computing the required return on corporate investments in such capital markets. This paper uses a model of partially integrated...

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,...

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 article examines the contribution of hedging to firm value and the cost of hedging in a unified framework. Optimal hedging and firm value are explicitly linked to firm risk, the type of debt covenants and the relative priority of the hedging contract. It is shown that in some cases hedging...

This study documents the fact that large dividend increases are followed by a significant increase in leverage, consistent with management increasing the dividend to use up excess debt capacity. However, the leverage increase is not captured by a standard partial adjustment model of leverage....

We examine changes in risk following US bank mergers in the period 1981-2014. Short-run increases in acquirer risk following mergers occur only in the first few mergers undertaken by the same acquirer, and only in systematic risk. The equity volatility of acquirers does not increase. Using a new...

This teaching note describes some important DCF-based formulas that are used for setting the horizon value in a corporate valuation. It shows the relationships between them and the key similarities/differences in assumptions. The formulas include the constant growth DCF formula, residual income...

We use a large sample of non-US banks to examine the propagation of the 2007-2009 crisis. Using both stock market and structural variables we test whether the relative incidence of the crisis was better explained by crisis models or by the VaR-type analysis of the Basel system. Consistent with...