Tax Shields, Financial Expenses and Losses Carried Forward
28 Pages Posted: 10 May 2010 Last revised: 3 Mar 2016
Date Written: August 3, 2013
When calculating the Weighted Average Cost of Capital (WACC), the well-known textbook formula includes tax shields with the (1-T) factor affecting the contribution of debt to WACC. In this work we develop a procedure for properly calculating tax shields including the case when Losses Carried Forward are allowed and there is Other Income. In this case, tax shields are not the difference in taxes but an adjustment is needed. This is relevant because the value of tax shields might be a substantial part of firm value.
Keywords: Weighted Average Cost of Capital, WACC, Firm Valuation, Tax Shields, Tax Savings, Losses Carried Forward
JEL Classification: D61, G31, H43
Suggested Citation: Suggested Citation