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Cost of Capital with Levered Cost of Equity as the Risk of Tax Shields

Author

Listed:
  • Joseph Tham

    ()

  • Ignacio Velez Pareja

    ()

Abstract

We present the derivation of cost of capital under the assumption of risky tax shields discounted with the cost of levered equity. We show that the formulation is consistent and is derived from basic financial principles. This formulation is valid for finite cash flows and non growing perpetuities. In addition, it can be calculated without the circularity between value and discount rate.

Suggested Citation

  • Joseph Tham & Ignacio Velez Pareja, 2010. "Cost of Capital with Levered Cost of Equity as the Risk of Tax Shields," PROYECCIONES FINANCIERAS Y VALORACION 007315, MASTER CONSULTORES.
  • Handle: RePEc:col:000463:007315
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    File URL: http://ssrn.com/abstract=1655244
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    More about this item

    Keywords

    Cost of levered equity; firm valuation; tax shields; discount rate for tax shields; risk of tax shields;

    JEL classification:

    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics
    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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