Tax Shields in an LBO

Freie University Working Paper No. 2000/02

12 Pages Posted: 3 Apr 2000  

Andreas Loeffler

Freie Universität Berlin

Date Written: January 2000

Abstract

In a typical LBO debt is reduced by a substantial part of the firm's cash flow. The object of the paper is to analyze whether the tax advantage of this debt transaction plan can be evaluated using the WACC or the APV method. It turns out that none of them is appropriate, and we will provide a different approach using the theory of derivatives to value the tax shield. We compare our approach with WACC and APV and the finding is that the cost of debt are always less than the riskless rate.

JEL Classification: G32

Suggested Citation

Loeffler, Andreas, Tax Shields in an LBO (January 2000). Freie University Working Paper No. 2000/02. Available at SSRN: https://ssrn.com/abstract=217148 or http://dx.doi.org/10.2139/ssrn.217148

Andreas Loeffler (Contact Author)

Freie Universität Berlin ( email )

Boltzmannstr. 20
Berlin, 14195
Germany

HOME PAGE: http://www.andreasloeffler.de

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