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dc.contributor.authorMolnar, Peter
dc.contributor.authorNyborg, Kjell Gustav
dc.date.accessioned2017-11-14T09:22:01Z
dc.date.available2017-11-14T09:22:01Z
dc.date.created2011-11-22T10:39:06Z
dc.date.issued2013
dc.identifier.citationEuropean Financial Management. 2013, 19 (3), 419-428.
dc.identifier.issn1354-7798
dc.identifier.urihttp://hdl.handle.net/11250/2466078
dc.description.abstractCooper and Nyborg (2008) derive a tax-adjusted discount rate formula under a constant proportion leverage policy, investor taxes and risky debt. However, their analysis assumes zero recovery in default. We extend their framework to allow for positive recovery rates. We also allow for differences in bankruptcy codes with respect to the order of priority of interest payments versus repayment of principal in default, which may have tax consequences. The general formula we derive differs from that of Cooper and Nyborg when recovery rates in default are anticipated to be positive. However, under continuous rebalancing, the formula collapses to that of Cooper and Nyborg. We provide an explanation for why the effect of the anticipated recovery rate is not directly visible in the general continuous rebalancing formula, even though this formula is derived under the assumption of partial default. The errors from using the continuous approximation formula are sensitive to the anticipated recovery in default, yet small. The ‘cost of debt’ in the tax adjusted discount rate formula is the debt's yield rather than its expected rate of return.
dc.language.isoeng
dc.titleTax-adjusted Discount Rates: a General Formula under Constant Leverage Ratios
dc.typePeer reviewed
dc.typeJournal article
dc.description.versionsubmittedVersion
dc.source.pagenumber419-428
dc.source.volume19
dc.source.journalEuropean Financial Management
dc.source.issue3
dc.identifier.doi10.1111/j.1468-036X.2011.00619.x
dc.identifier.cristin860331
dc.relation.projectNorges forskningsråd: 199908
cristin.unitcode191,10,0,0
cristin.unitnameInstitutt for foretaksøkonomi
cristin.ispublishedtrue
cristin.fulltextpreprint
cristin.qualitycode1


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