The implied cost of capital of government’s claim and the present value of tax shields: A numerical example

M. B.J. Schauten; B. Tans

doi:10.24135/afl.v3i1.20

The implied cost of capital of government’s claim and the present value of tax shields: A numerical example

M. B.J. Schauten Erasmus University Rotterdam
B. Tans

DOI: https://doi.org/10.24135/afl.v3i1.20

Keywords: Corporate tax, Present value of tax shields, Required return on government’s claims, Cost of capital, WACC

Abstract

This paper provides a numerical example of how to calculate the cost of capital of government’s claim (r_g) and the present value of tax shields. Schauten and Tans (2006) show for the models used in Myers (1974), Miles and Ezzell (1980) and Harris and Pringle (1985), that the present value of tax shields is equal to the difference between the present value of the expected taxes paid by the unlevered firm and the levered firm, with each of the models’ implied r_g as discount rate. We discuss a numerical example using the valuation framework by Schauten and Tans (2006) and give a logic explanation for the low implied r_gs of Miles and Ezzell’s and Harris and Pringle’s model.

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Author Biography

M. B.J. Schauten, Erasmus University Rotterdam

M.B.J. Schauten is Assistant Professor in Finance, Erasmus University Rotterdam, Netherlands

Published

2014-06-30

How to Cite

Schauten, M. B., & Tans, B. (2014). The implied cost of capital of government’s claim and the present value of tax shields: A numerical example. Applied Finance Letters, 3(1), 40-48. https://doi.org/10.24135/afl.v3i1.20

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Issue

Vol. 3 No. 1 (2014): Yesterday's Tomorrows: Past Visions of Future Financial Markets

Section

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