The valuation of tax shields induced by asset step-ups in corporate acquisitions

Alexander P. Groh () and Christoph Henseleit
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Alexander P. Groh: IESE Business School, Postal: Research Division, Av Pearson 21, 08034 Barcelona, SPAIN
Christoph Henseleit: Bain & Co. Munich

No D/785, IESE Research Papers from IESE Business School

Abstract: We derive discount rates for depreciation and amortization tax shields resulting from asset step-ups in corporate mergers and acquisitions. By assigning all relevant sources of uncertainty for such kind of tax shields and by accounting for corporate debt it is shown that for APV valuations r*, a rate between the firm's cost of debt and the risk-free rate, is adequate to discount step-up induced depreciation benefits. When the benefits are valued on a standalone basis, the adequate discount rate is the after-tax weighted average of r*. Discount rates for these shields have been determined arbitrarily in empirical research on corporate acquisitions so far. However, they are found to be in line with the rates deduced in this paper.

Keywords: Tax Shield; Step-up Depreciation; Valuation (search for similar items in EconPapers)
JEL-codes: G12 G34 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2009-03-05
New Economics Papers: this item is included in nep-acc, nep-bec and nep-cfn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ebg:iesewp:d-0785

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