Tax Shields, Financial Expenses and Losses Carried Forward

Velez-Pareja, Ignacio

doi:10.2139/ssrn.1604082

Tax Shields, Financial Expenses and Losses Carried Forward

28 Pages Posted: 10 May 2010 Last revised: 3 Mar 2016

See all articles by Ignacio Velez-Pareja

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation

Date Written: August 3, 2013

Abstract

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

Velez-Pareja, Ignacio, Tax Shields, Financial Expenses and Losses Carried Forward (August 3, 2013). Suggested Citation: Vélez-Pareja, I. (2016). Tax shields, financial expenses and losses carried forward. Cuadernos de Economía, 35(69), 663-689. Available at SSRN Abstract 1604082. Available at SSRN: https://ssrn.com/abstract=1604082 or http://dx.doi.org/10.2139/ssrn.1604082