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

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.

[1]  Kjell G. Nyborg,et al.  The Value of Tax Shields is Equal to the Present Value of Tax Shields: Further Remarks , 2004 .

[2]  Kjell G. Nyborg,et al.  The Value of Tax Shields is Equal to the Present Value of Tax Shields , 2004 .

[3]  Pablo Fernandez,et al.  Valuation Methods and Shareholder Value Creation , 2002 .

[4]  Ignacio Vélez-Pareja,et al.  The Correct Discount Rate for the Tax Shield: The N-Period Case , 2001 .

[5]  Richard S. Ruback,et al.  Capital Cash Flows: A Simple Approach to Valuing Risky Cash Flows , 2000 .

[6]  Luehrman Ta,et al.  Using APV (adjusted present value): a better tool for valuing operations. , 1997 .

[7]  Howard Kaufold,et al.  TWO DCF APPROACHES FOR VALUING COMPANIES UNDER ALTERNATIVE FINANCING STRATEGIES (AND HOW TO CHOOSE BETWEEN THEM) , 1997 .

[8]  Richard S. Ruback,et al.  The Valuation of Cash Flow Forecasts: An Empirical Analysis , 1994 .

[9]  Robert A. Taggart,et al.  Consistent Valuation and Cost of Capital Expressions with Corporate and Personal Taxes , 1989 .

[10]  Wilbur G. Lewellen,et al.  Corporate Debt Management and the Value of the Firm , 1986, Journal of Financial and Quantitative Analysis.

[11]  J. A. Miles,et al.  Reformulating Tax Shield Valuation: A Note , 1985 .

[12]  Robert S. Harris,et al.  RISK‐ADJUSTED DISCOUNT RATES‐EXTENSIONS FROM THE AVERAGE‐RISK CASE , 1985 .

[13]  J. A. Miles,et al.  The Weighted Average Cost of Capital, Perfect Capital Markets, and Project Life: A Clarification , 1980, Journal of Financial and Quantitative Analysis.

[14]  Merton H. Miller,et al.  DEBT AND TAXES , 1977 .

[15]  H. Levy,et al.  The Weighted Average Cost of Capital as a Cutoff Rate: A Critical Analysis of the Classical Textbook Weighted Average , 1977 .

[16]  Stewart C. Myers,et al.  Interactions of Corporate Financing and Investment Decisions-Implications for Capital Budgeting , 1974 .

[17]  F. Modigliani,et al.  CORPORATE INCOME TAXES AND THE COST OF CAPITAL: A CORRECTION , 1963 .

[18]  Merton H. Miller.  The Cost of Capital, Corporation Finance and the Theory of Investment , 1958 .