Calculating tax shields from financial expenses with losses carried forward

Ignacio Velez-Pareja ()

No 7071, Proyecciones Financieras y Valoración from Master Consultores

Abstract: When calculating the Weighted Average Cost of Capital (WACC), the well-known textbook formula includes tax shields with the (1-T) factor affecting the contribution of debt to WACC. In this work we develop a procedure for properly calculating tax shields including the case when Losses Carried Forward are allowed and there is Other Income. The proper calculation of tax shields is relevant because the value of tax shields might be a substantial part of firm value. We show that tax shields depend on Earnings before Interest and Taxes and therefore the risk of tax shields is the risk of the free cash flow; this is the cost of unlevered equity.

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)
Pages: 20
Date: 2010-06-03
References: Add references at CitEc
Citations:

Downloads: (external link)
http://ssrn.com/abstract=1604082

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:col:000463:007071

Access Statistics for this paper

More papers in Proyecciones Financieras y Valoración from Master Consultores
Bibliographic data for series maintained by Ignacio Velez ().