Investment Valuation with Tax-optimized Financing Decisions and a Tax-optimized Default Alternative

In this paper we evaluate an indivisible investment project that is carried out in a corporation under very simple premises. In particular, we discuss a one-period model with certainty, the pure domestic case and proportional tax rates. Surprisingly, the decision problem turns out to be rather complex if one has to make allowance for different taxation of the corporation and its owner. Altogether there are more than 10 cases that have to be distinguished if the firm's managers want to make a correct decision, depending on the relation of personal and corporate tax rates.

Tax-Optimal Step-Up and Imperfect Loss Offset

In the field of mergers and acquisitions, German and international tax law allow for several opportunities to step up a firm's assets, i.e., to revaluate the assets at fair market values. When a step-up is performed the taxpayer recognizes a taxable gain, but also obtains tax benefits in the form of higher future depreciation allowances associated with stepping up the tax base of the assets. This tax-planning problem is well known in taxation literature and can also be applied to firm valuation in the presence of taxation. However, the known models usually assume a perfect loss offset. If this assumption is abandoned, the depreciation allowances may lose value as they become tax effective at a later point in time, or even never if there are not enough cash flows to be offset against. This aspect is especiallyrelevant if future cash flows are assumed to be uncertain. This paper shows that a step-up may be disadvantageous or a firm overvalued if these aspects are not integrated into the basic calculus. Compared to the standard approach, assets should be stepped up only in a few cases and - under specific conditions - at a later point in time. Firm values may be considerably lower under imperfect loss offset.

Dr. Ralph Garber, Canada, President of IASSW 1988 - 1996

A fully revealing portrait of Ralph Garber would require a latter-day Boswell. As ordained, however, an attempt must be made to create a recognizable word picture. And it must give initial attention to the range of influences and factors in Ralph Garber's inheritance and environment that, throughout his life, he experienced, absorbed and utilized in his remarkably creative career.

Dr. Ralph Garber (Canada), President 1988 - 1996

A fully revealing portrait of Ralph Garber would require a latter-day Boswell. As ordained, however, an attempt must be made to create a recognizable word picture. And it must give initial attention to the range of influences and factors in Ralph Garber's inheritance and environment that, throughout his life, he experienced, absorbed and utilized in his remarkably creative career.