Abstract

http://ssrn.com/abstract=801906
 
 

References (16)



 
 

Citations (38)



 


 



A Reconsideration of Tax Shield Valuation


Enrique R. Arzac


Columbia Business School - Finance and Economics

Lawrence R. Glosten


Columbia Business School - Finance and Economics


European Financial Management, Vol. 11, No. 4, pp. 453-461, September 2005

Abstract:     
A quarter-century ago, Miles and Ezzell (1980) solved the valuation problem of a firm that follows a constant leverage ratio L = D/S. However, to this day, the proper discounting of free cash flows and the computation of WACC are often misunderstood by scholars and practitioners alike. For example, it is common for textbooks and fairness opinions to discount free cash flows at WACC with beta input Bs = [1 + (1-t)L]Bu, although the latter is not consistent with the assumption of constant leverage. This confusion extends to the valuation of tax shields and the proper implementation of adjusted present value procedures. In this paper, we derive a general result on the value of tax shields, obtain the correct value of tax shields for perpetuities, and state the correct valuation formulas for arbitrary cash flows under a constant leverage financial policy.

Number of Pages in PDF File: 9

Accepted Paper Series





Date posted: October 29, 2005  

Suggested Citation

Arzac, Enrique R. and Glosten, Lawrence R., A Reconsideration of Tax Shield Valuation. European Financial Management, Vol. 11, No. 4, pp. 453-461, September 2005. Available at SSRN: http://ssrn.com/abstract=801906

Contact Information

Enrique R. Arzac (Contact Author)
Columbia Business School - Finance and Economics
3022 Broadway
New York, NY 10027
United States

Lawrence R. Glosten
Columbia Business School - Finance and Economics ( email )
3022 Broadway
New York, NY 10027
United States

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