Valuing the Debt Tax Shield

Posted: 13 Apr 2007

See all articles by Ian A. Cooper

Ian A. Cooper

London Business School

Kjell G. Nyborg

University of Zurich - Department of Banking and Finance; Centre for Economic Policy Research (CEPR); Swiss Finance Institute

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Abstract

We review the following debates and show their implications for debt tax shield valuation:

-Does the value of the debt tax shield reflect the full corporate tax rate or a lower rate?

-Does the value of the tax shield differ in tax regimes that favor dividends?

-Should you value the tax shield by using adjusted present values or by adjusting the discount rate?

-If you use adjusted present value, how should you obtain the discount rate?

-What formula should be used for the present value of the tax shield?

We show that these issues can have large effects on the estimated value of the debt tax shield.

Keywords: value of tax shields, APV, WACC, capital cash flow

JEL Classification: G12, G31, G32, M21

Suggested Citation

Cooper, Ian Anthony and Nyborg, Kjell G., Valuing the Debt Tax Shield. Journal of Applied Corporate Finance, Vol. 19, No. 2, Spring 2007, Available at SSRN: https://ssrn.com/abstract=979719

Ian Anthony Cooper (Contact Author)

London Business School ( email )

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Kjell G. Nyborg

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland
+41 (0)44 634 2980 (Phone)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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