Realised tax benefits and capital structure Online publication date: Fri, 18-Jul-2014
by Tian-Shyr Dai; Chuan-Ju Wang
International Journal of Bonds and Derivatives (IJBD), Vol. 1, No. 1, 2013
Abstract: We examine the change of levered firm's capital structures due to different investment decisions of realised tax benefits and various sources of fund to finance coupon and dividend payouts. The complexity is analytically intractable but numerical approaches provide insights. Retaining realised tax benefits and investing them in risk-free assets instead of risky ones result in higher debt capacity and optimal firm value. The impact of positive-net-worth bond covenants on shareholders' investment decisions of realised tax benefits and the related agency problem are analysed. The impact of selling firm's asset (to finance payout) on optimal levered firm value is also analysed.
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