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A General Framework for Tax Shield Valuation

Author

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  • Lee, Woongki

    (Yonsei University)

Abstract

This study develops a general valuation framework that delivers internally consistent valuations for all forms of firm capital and for the tax shield associated with their combination. This consistency is achieved by incorporating the interdependence among the components of a levered firm’s cash flows. The study reexamines classical tax shield valuation models within the same framework and clarifies the conditions under which each arises as a special case. A central finding is that these models depend not only on stated assumptions but on an implicit assumption that debt is risk-free. This hidden assumption is more restrictive than it may appear.

Suggested Citation

  • Lee, Woongki, 2026. "A General Framework for Tax Shield Valuation," SocArXiv dwste_v1, Center for Open Science.
    • Handle: RePEc:osf:socarx:dwste_v1
    DOI: 10.31235/osf.io/dwste_v1
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    References listed on IDEAS

    as
    1. Richard S Ruback, 2002. "Capital Cash Flows: A Simple Approach to Valuing Risky Cash Flows," Financial Management, Financial Management Association, vol. 31(2), Summer.
    2. Cooper, Ian A. & Nyborg, Kjell G., 2006. "The value of tax shields IS equal to the present value of tax shields," Journal of Financial Economics, Elsevier, vol. 81(1), pages 215-225, July.
    Full references (including those not matched with items on IDEAS)

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