The Value of Tax Shields is Not Equal to the Present Value of Tax Shields

22 Pages Posted: 5 May 2003 Last revised: 5 Aug 2008

See all articles by Pablo Fernandez

Pablo Fernandez

University of Navarra - IESE Business School

Date Written: May 5, 2003

Abstract

The value of tax shields is the difference between the present values of two different cash flows, each with their own risk: the present value of taxes for the unlevered company and the present value of taxes for the levered company. For constant growth companies, the value of tax shields in a world with no leverage cost is the present value of the debt, times the tax rate, times the unlevered cost of equity, discounted at the unlevered cost of equity. This result arises as the difference of two present values and does not mean that the appropriate discount for tax shields is the unlevered cost of equity.

Keywords: value of tax shields, required return to equity, leverage cost, unlevered beta, levered beta

JEL Classification: G12, G31, G34

Suggested Citation

Fernandez, Pablo, The Value of Tax Shields is Not Equal to the Present Value of Tax Shields (May 5, 2003). EFMA 2003 Helsinki Meetings. Available at SSRN: https://ssrn.com/abstract=290727 or http://dx.doi.org/10.2139/ssrn.290727

Pablo Fernandez (Contact Author)

University of Navarra - IESE Business School ( email )

Camino del Cerro del Aguila 3
28023 Madrid
Spain
+34 91 357 0809 (Phone)
+34 91 357 2913 (Fax)

HOME PAGE: http://web.iese.edu/PabloFernandez/

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