On the Risk-Neutral Value of Debt Tax Shields
Posted: 11 Aug 2011 Last revised: 17 Oct 2011
Date Written: August 9, 2011
The recent interest in the valuation of the benefits from debt financing arises from the disagreement in the financial literature about the meaning of “value of tax shields.” Although it is accepted that the tax deductibility of interest increases the value of the firm, the correct valuation of this extra-value is controversial. We adopt a risk-neutral approach to derive a general formula for the value of tax shields. This framework clearly shows that this value equals the summation of the discounted future tax savings. Once we specify a leverage policy and a cash flow dynamics some well-known formulas are obtained.
Keywords: Value of Tax Shields, Leverage Policy, WACC, APV
JEL Classification: G12, G31, G32
Suggested Citation: Suggested Citation