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Cost of Capital with Levered Cost of Equity as the Risk of Tax ShieldsJoseph ThamDuke University - Duke Center for International Development in the Sanford School of Public Policy Ignacio Velez-ParejaMaster Consultores James W. KolariTexas A&M University - Department of Finance December 25, 2010 Mays Business School Research Paper No. 2011-12 Abstract: We present the derivation of cost of capital under the assumption of risky tax shields discounted with the cost of levered equity. We show that the formulation is consistent and is derived from basic financial principles. This formulation is valid for finite cash flows and non growing perpetuities. In addition, it can be calculated without the circularity between value and discount rate. The Spanish version of this paper can be found at http://ssrn.com/abstract=1684488.
Number of Pages in PDF File: 11 Keywords: Cost of levered equity, firm valuation, tax shields, discount rate for tax shields, risk of tax shields JEL Classification: M21, M4, M46, M41, G12, G31, J33 working papers seriesDate posted: August 10, 2010 ; Last revised: December 19, 2011Suggested CitationContact Information
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