Tax Shields in an Lbo
Freie University Working Paper No. 2000/02
12 Pages Posted: 3 Apr 2000
Date Written: January 2000
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: Suggested Citation