Return to basics: are you properly calculating tax shields?

Ignacio Velez-Pareja ()

No 5152, Proyecciones Financieras y Valoración from Master Consultores

Abstract: Everybody uses tax shields when calculating the Weighted Average Cost of Capital (WACC). The textbook formula includes the tax shield with the (1-T) factor affecting the contribution of debt to the WACC. Tax shields are a strange mix of accounting and accrual related to WACC that relies on market values. In this short work we show some limitations and care that have to be taken when using tax shields. We illustrate these ideas with simple examples.

Keywords: Weighted average cost of capital; WACC; firm valuation; capital budgeting; tax shields; tax savings (search for similar items in EconPapers)
JEL-codes: D61 G31 H43 (search for similar items in EconPapers)
Pages: 10
Date: 2008-11-23
References: Add references at CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:col:000463:005152

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