Cost of Capital with Levered Cost of Equity as the Risk of Tax Shields

Joseph Tham () and Ignacio Velez-Pareja ()

No 7315, Proyecciones Financieras y Valoración from Master Consultores

Abstract: We present the derivation of cost of capital under the assumption of risky tax shields discounted with the cost of levered equity. We show that the formulation is consistent and is derived from basic financial principles. This formulation is valid for finite cash flows and non growing perpetuities. In addition, it can be calculated without the circularity between value and discount rate.

Keywords: Cost of levered equity; firm valuation; tax shields; discount rate for tax shields; risk of tax shields (search for similar items in EconPapers)
JEL-codes: G12 G31 J33 M21 M4 M41 (search for similar items in EconPapers)
Pages: 7
Date: 2010-08-22
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Persistent link: https://EconPapers.repec.org/RePEc:col:000463:007315

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