In a forthcoming paper, Fernandez (2002) claims to derive a formula for the valuation of debt tax shields for firms with cash flows that grow perpetually at a constant rate. We show that his formula is incorrect and provide an example where his valuation would admit arbitrage

In a forthcoming paper, Fernandez (2002) claims to derive a formula for the valuation of debt tax shields for firms with cash flows that grow perpetually at a constant rate. We show that his formula is incorrect

In a recent paper, Pablo Fernandez (2002) makes the unusual and paradoxical sounding claim that for cash flows in perpetuity with a constant growth rate g, the value of the tax shields VTS is NOT equal to the present value of the tax shields. To be specific, Fernandez purportedly shows that the...

In the standard CAPM with a riskless asset we give a sufficient condition for uniqueness. This condition is a joint restriction on the agents' endowments and their preferences which is compatible with non-increasing absolute risk aversion and which is in particular satisfied with constant...

The conventional wisdom about psi, the appropriate discount rate for the tax shield, is as follows. If the tax shield is risk-free, that is, the revenue is sufficient to ensure that the interest deduction will be used with full certainty in the relevant period, then the appropriate discount rate...

There are two ways to view the inter-temporal risk profile of a finite stream of cash flows that is represented by a binomial process. We can examine the risk profile of the cash flow process or the value process that is derived from the cash flow process. First, with respect to a given year n,...

In a recent paper, Ruback (2000) assumes that the discount rate for the tax shield in the Adjusted Present Value (APV) approach is the cost of debt and shows that the Capital Cash Flow (CCF) method and the Adjusted Present Value (APV) approach give different answers for the levered value. In...

In a recent paper, Loeffler (2001) showed that the Miles amp; Ezzell (M amp; E) WACC allows arbitrage if the cash flow process does not have a quot;certain growth ratequot;. To be specific, for a particular period, the set of up and down coefficients must be the same at all the nodes in a...

Share prices fluctuate far more than dividends. In contemporary lit- erature, this excess volatility is usually discussed involving the Camp- bell-Shiller present value identity. In our view, it is more appropriate to model future dividends and prices explicitly as random variables. We refer to...