Non tax sheild

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1、8ManagerialEconomicsChapter12Non-debtTaxShieldsDeAngeloandMasulis(1980)(DM)extendedMMandMillerbyincludingothertaxshieldsbesidesinterest,i.e.non-debttaxshields(NDTS).ExistenceofNDTSÞ¯taxableincomeÞ¯probabilityofbeingabletouseallofITSe.g.ofNDTS:depreciationanddepletionallowancesÞlargeraresuchallow

2、anceslessistheneedfortheITSÞlessisincentivetouseFLVL=Vu+TB-PTIÞDMfindthatsucha‘balancing’ÞKS<100%debtÞKSwillbebetween0%and100%debt.VVL=Vu+TBFig.12-4VL=Vu+TB-PTI-NDTSVuPTI=personaltaximpactFLFL*Fig.12-4showsthatinclusionofPTIandNDTSreducesthegainsfromleverageÞanoptimalKSmayexistatwhichthemargina

3、lbenefitsofextradebtareexactlyoffsetbytaxconsequencesoftheextradebt.FinancialDistressCostsFinancialdistress(FD)occurswhenfirmishavingdifficultymeetingitsfinancialobligationsConceivingthefirmasacalloption:attimeofdebtmaturityifvalueofassets>valueofdebtÞexerciseoption,paybondholdersandclaimrestofV

4、forstockholders.8ManagerialEconomicsChapter12Ifthereis‘alossinvalueofthefirm’sassets,...’thenlimitedliabilityÞstockholders‘walkaway’andturnfirmovertobondholders.Þ‘lossinvalue’triggersexercisingofoptionÞ‘thelossinvalueiswhatleadstobankruptcy.’-NotthereverseBankruptcyCosts(BC)BCrepresentlegalandot

5、herdirectcostsassociatedwithbankruptcyorreorganization-onlyaccountantsandlawyersbenefitfromBCBCrepresent0-5%ofVandarenotlargeenoughtooffsetMMarguments.RiskShiftingAfirminsevereFD--wherevalueofdebtexceedscurrentmarketvalue--maybemoreinclinedtoacceptriskierprojects.SuchhighriskprojectsmayhaveNPV<0

6、butwouldbeacceptedbecauselowerriskprojectsprovideinsufficientCFtoservicethedebt(assumingfirmhascashtofundproject).ÞinterestsofstockholdersistiedtohighriskinvestmentwhileinterestsofbondholdersaretiedtolowerriskprojectÞAssetsubstitutionproblem--whenafirminvestsinmoreriskyassetsthanthoseexpectedbyt

7、hefirm’sbondholders(creditors).FailingtoInvestInsamesituationasabovebutfirmdoesnothavecashtofundprojectÞtheinvestment--evenifit’sa‘surewinner’--willnotbemadebecausemostorallofNPVwillgotobondholders.SincewithNPV>0ofVwillbesha