Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/233133
Authors: 
Krause, Marko Volker
Year of Publication: 
2019
Citation: 
[Journal:] Business Research [ISSN:] 2198-2627 [Volume:] 12 [Year:] 2019 [Issue:] 2 [Pages:] 703-720
Abstract: 
De- and re-levering betas is important to obtain discount rates for assets that are not publicly traded. A de- and re-levering procedure is around for the case of risk-free debt. The procedure for risky debt is much less clear even under very simplifying assumptions. In this paper, I concretize and extend the procedure for de- and re-levering of betas for companies with risky debt. I derive procedures for different assumptions on the taxation of a cancellation of debt (COD) and for different assumptions regarding the distribution of losses on interest and principal payments. With a tax on the COD I obtain known results. However, without taxes on a COD, the distribution of losses on interest and principal payments matters and equations differ markedly for different assumptions on the assignment of losses to interest and principal payments. Furthermore, using a procedure that does not fit the COD treatment is likely to lead to substantial deviations for de- and re-levered betas from their correct values.
Subjects: 
Default risk
Tax treatment of default
Betas
Leverage
JEL: 
G12
G31
G32
G33
Persistent Identifier of the first edition: 
Creative Commons License: 
https://creativecommons.org/licenses/by/4.0/
Document Type: 
Article

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