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Financial Decisions And Tax Shields

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  • Petr Marek
  • Jarmila Radova

Abstract

This paper addresses two questions related to tax shields. Firstly, what is the real moment of tax shield realization? Secondly, what influence shall the real tax shield realization moment have on tax shield present value? The real moment of tax shield realization is defined at the moment when the tax shield is reflected in the taxpayer’s cash flow, in the form of income tax reconciliation and paid tax deposits. Subsequently, authors have investigated the dependence of tax shield present value on the discount rate, and on the size of a time span between the moment of tax-shield claim origination and tax-period’s end. The largest difference between basic value of the tax shield and its present value was found at the maximum discount rate considered in the model, and at the maximum size of the time span between the moment of tax-shield claim origination and tax-period’s end. The dependence was not always linear. In conclusion modifications of financial models that employ tax shields are suggested. These modifications are based on including coefficients reflecting the real moment of tax shield realization.

Suggested Citation

  • Petr Marek & Jarmila Radova, 2007. "Financial Decisions And Tax Shields," Global Journal of Business Research, The Institute for Business and Finance Research, vol. 1(2), pages 133-143.
  • Handle: RePEc:ibf:gjbres:v:1:y:2007:i:2:p:133-143
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