Reconciling the Two Approaches
Inthespecificcasethatweexamined,thevalueofequityis
lowerusingthenetdebtratioapproachthanwiththegross
debtratioapproach,butthatisnotalways thecase.Figure
10.5reportsthevalueofthefirmjustdescribedfortaxrates
varyingfrom 0 percentto 50 percent.Fortaxrateslessthan
15 percent, thenet debt value approach delivers a higher
valueforequitythanthegrossdebtratioapproach.Infact,the
equityvalueisidenticalifweassumeazerotaxrateandthat
the cost of debt is the risk-free rate.
FIGURE10.5TaxRateandEquityValue—GrossDebtand
Net Debt Approaches