Return to basics: are you properly calculating tax shields?

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.

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Year of publication:	2008-11-23
Authors:	Velez-Pareja, Ignacio
Institutions:	MASTER CONSULTORES
Subject:	Weighted average cost of capital \| WACC \| firm valuation \| capital budgeting \| tax shields \| tax savings

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Series:	PROYECCIONES FINANCIERAS Y VALORACION.
Type of publication:	Book / Working Paper
Notes:	1 pages long
Classification:	D61 - Allocative Efficiency; Cost-Benefit Analysis ; G31 - Capital Budgeting; Investment Policy ; H43 - Project Evaluation; Social Discount Rate
Source:	RePEc - Research Papers in Economics

Persistent link: https://www.econbiz.de/10010762979