Valuing the Debt Tax Shield
Posted: 13 Apr 2007
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: Suggested Citation