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
Date Written: December 25, 2010
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
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