Valuing the Debt Tax Shield
AbstractThe tax shield from debt represents a significant proportion of total value for many companies, projects, and transactions. Accurate valuation of the debt tax shield is of more importance than ever as leverage is now commonly used as a source of value added, and there is growing competition in buying assets. Changes in tax rules and more international transactions also make it important to understand how to value debt tax shields under different tax regimes. The increased practical importance of accurate valuation of the debt tax shield has been paralleled by debates among researchers about how to do it. The different approaches have large effects on estimated values. In this article, we review these approaches and show their implications for practical debt tax shield valuation. The issue we stress is that each method relies on a few basic assumptions, primarily about the risk of debt tax shields. Picking the most appropriate assumption in any particular situation and then using only those procedures that are consistent with that assumption is the key to good valuation of debt tax shields. Using inconsistent procedures can lead to large errors. The structure of the article is as follows: We start by giving a brief overview of the theory. Then we review the tensions that exist in the âhow to value tax shieldsâ literature. Next, we discuss the practical implications of the various approaches and show by way of an example the large errors that can arise if incorrect and inconsistent valuation methods are used. Finally, we offer our views as to which methods and assumptions are most appropriate in various real world economic settings.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Morgan Stanley in its journal Journal of Applied Corporate Finance.
Volume (Year): 19 (2007)
Issue (Month): 2 ()
Contact details of provider:
Web page: http://www.blackwellpublishing.com/journal.asp?ref=1078-1196
Other versions of this item:
- G00 - Financial Economics - - General - - - General
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Qi, Howard, 2011. "Value and capacity of tax shields: An analysis of the slicing approach," Journal of Banking & Finance, Elsevier, vol. 35(1), pages 166-173, January.
- Assaf Eisdorfer, 2012. "The firm-specific nature of debt tax shields and optimal corporate investment decisions," Managerial Finance, Emerald Group Publishing, vol. 38(6), pages 560-570, May.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.