The Value of Tax Shields is Not Equal to the Present Value of Tax Shields
University of Navarra - IESE Business School
May 5, 2003
EFMA 2003 Helsinki Meetings
The value of tax shields is the difference between the present values of two different cash flows, each with their own risk: the present value of taxes for the unlevered company and the present value of taxes for the levered company. For constant growth companies, the value of tax shields in a world with no leverage cost is the present value of the debt, times the tax rate, times the unlevered cost of equity, discounted at the unlevered cost of equity. This result arises as the difference of two present values and does not mean that the appropriate discount for tax shields is the unlevered cost of equity.
Number of Pages in PDF File: 22
Keywords: value of tax shields, required return to equity, leverage cost, unlevered beta, levered beta
JEL Classification: G12, G31, G34working papers series
Date posted: May 5, 2003 ; Last revised: August 5, 2008
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