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The Value of Tax Shields is Not Equal to the Present Value of Tax Shields: A Correction

8 Pages Posted: 3 Feb 2005  

Pablo Fernandez

University of Navarra - IESE Business School

Date Written: January 19, 2005

Abstract

I correct some expressions of Fernandez (2004) and provide a more general expression for the value of tax shields. This expression is the difference between the present values of two different cash flows, each with its own risk: The present value of taxes for the unlevered company and the present value of taxes for the levered company. The value of tax shields in a world with no leverage cost is the tax rate times the current debt, plus the tax rate times the present value of the net increases of debt. The value of tax shields depends only on the nature of the stochastic process of the net increase of debt; it does not depend on the nature of the stochastic process of the free cash flow.

Keywords: Value of tax shields, present value of the net increases of debt, required return to equity

JEL Classification: G12, G31, G32

Suggested Citation

Fernandez, Pablo, The Value of Tax Shields is Not Equal to the Present Value of Tax Shields: A Correction (January 19, 2005). Available at SSRN: https://ssrn.com/abstract=651206 or http://dx.doi.org/10.2139/ssrn.651206

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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