Tax shields, financial expenses and losses carried forward

Ignacio Velez-Pareja ()

Revista Cuadernos de Economia, 2016, vol. 35, issue 69, 663-689

Abstract: This article deals with the proper procedure for calculating Tax Shields (TS). The calculation includes cases where Losses Carried Forward are allowed and there is financial Other Income (OI). The procedure takes into account the magnitude of Adjusted Earnings before Interest and Taxes (EBITAdj) —that is, EBIT + OI – OE excluding Financial— compared with Financial Expenses (FE). This comparison defines three intervals and results for TS. If EBITAdj. 0 and less than FE, TS is T × EBITAdj.; finally if EBITAdj. > FE, TS is T × FE. When firm possesses OI, TS are not equivalent to the difference in taxes and an adjustment is needed. Proper calculation of TS is important because their value might represent a substantial part of firm value. ***** Este artículo define el procedimiento adecuado para calcular los ahorros en impuestos (AI). Incluye el caso en que se permiten pérdidas amortizadas y hay otros ingresos financieros. El procedimiento compara la utilidad antes de intereses e impuestos ajustada (UAIIAj) —eso es UAII+OI–OE excl. Financieros— en comparación con los gastos financieros (GF). Esto define tres intervalos y resultados para AI. Si UAIIAj 0 y menor que GF, AI es T x UAIIAj, por último, si UAIIAj > GF, AI es T x GF. Cuando existen otros ingresos financieros, los AI no son la diferencia en los impuestos y se necesita un ajuste. Calcular adecuadamente los AI es relevante debido a que su valor podría ser una parte importante del valor de la empresa.

Keywords: Weighted Average Cost of Capital (WACC); firm valuation; tax shields; tax savings; losses carried forward (search for similar items in EconPapers)
JEL-codes: D61 G31 H43 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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