Cost of Capital with Levered Cost of Equity as the Risk of Tax Shields

11 Pages Posted: 10 Aug 2010 Last revised: 19 Dec 2011

See all articles by Joseph Tham

Joseph Tham

Duke University - Duke Center for International Development in the Sanford School of Public Policy; Academy of Public Administration under the President of the Republic of Kazakhstan

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation

James W. Kolari

Texas A&M University - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: December 25, 2010

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.

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

Suggested Citation

Tham, Joseph and Velez-Pareja, Ignacio and Kolari, James W., Cost of Capital with Levered Cost of Equity as the Risk of Tax Shields (December 25, 2010). Mays Business School Research Paper No. 2011-12. Available at SSRN: https://ssrn.com/abstract=1655244 or http://dx.doi.org/10.2139/ssrn.1655244

Joseph Tham

Duke University - Duke Center for International Development in the Sanford School of Public Policy ( email )

Box 90312
302, Towerview Dr, Rubenstein Hall, Room 272
Durham, NC 27708
United States
919-613-9234 (Phone)
919-681-0831 (Fax)

HOME PAGE: http://fds.duke.edu/db/Sanford/faculty/thamjx

Academy of Public Administration under the President of the Republic of Kazakhstan ( email )

Abay Street, 33a
Astana
Kazakhstan
+7 8 7172753422 (Phone)

Ignacio Velez-Pareja (Contact Author)

Grupo Consultor CAV Capital Advisory & Valuation ( email )

Ave Miramar # 18-93 Apt 6A
Cartagena
Colombia
+573112333074 (Phone)

HOME PAGE: http://cashflow88.com/decisiones/decisiones.html

James W. Kolari

Texas A&M University - Department of Finance ( email )

MS-4218
Department of Finance
College Station, TX TX 77843-4218
United States
979-845-4803 (Phone)
979-845-3884 (Fax)

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