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Hello Prof,
I was doing this part of the portion when i came across a statement as follows:
“The method used to gear and ungear betas is based on the assumption that debt is perpetual. This overvalues the tax shield where debt is finite”
I dont understand the tax shield overvaluation point.
could you please explain?
With irredeemable debt, the interest is payable for ever and therefore the tax benefit is received for ever.
With redeemable debt, the interest is only paid for a limited number of years and therefore the tax saving is only received for a limited number of years instead
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