Valuation of tax loss carryforwards

Sudipto Sarkar ()

Review of Quantitative Finance and Accounting, 2014, vol. 43, issue 4, 803-828

Abstract: Tax loss carryforwards (TLC) are a valuable asset because they can potentially reduce a company’s future tax payments. However, there is often a great deal of uncertainty regarding the probability and timing of these tax savings. We propose a contingent-claim model to value this asset. The value is determined primarily by the size of accumulated carryforwards relative to earnings. We show that, for poorly performing firms with large TLC, (1) the realizable (or fair) value of the tax losses can be significantly smaller than the book value, and (2) the tax losses can account for a significant fraction of the company’s equity value. The model is illustrated by calibrating it to a couple of companies with large carryforwards. Finally, we show how the model can be used to compute the marginal tax rate of a company with carryforwards. Copyright Springer Science+Business Media New York 2014

Keywords: Tax loss carryforwards; Net operating losses; Valuation; Contingent-claim model; G3. (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (5)

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DOI: 10.1007/s11156-013-0393-5

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