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The Role Of Risk In The Valuation Of Tax Shield

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  • Lucia MICHALKOVA
  • Tomas KLIESTIK

Abstract

Finding the optimal capital structure is one of the crucial aspects of corporate finance. The value of the company / project, which is funded by equity and debt, is higher because of the tax advantage of debt - interest tax shield. Debt and the interest tax shield are not risk-free as assumed by Modigliani and Miller (1963); they are subject to business risk - operational, credit and default risk. The aim of this paper is to analyse, compare and classify models of the present value of tax shield to the risk profile of debt and tax shield. In addition to the comparison, the Fernandez (2006) algorithm was used to identify the risk of this cash flow. The results indicate that five different discount rates according to risk profile can be used to quantify the present value of tax shield: risk-free interest rate, cost of debt, unlevered cost of capital, leveraged cost of equity and option-based stochastic discount factor.

Suggested Citation

  • Lucia MICHALKOVA & Tomas KLIESTIK, 2019. "The Role Of Risk In The Valuation Of Tax Shield," Proceedings of the INTERNATIONAL MANAGEMENT CONFERENCE, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 13(1), pages 218-233, November.
    • Handle: RePEc:rom:mancon:v:13:y:2019:i:1:p:218-233
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    References listed on IDEAS

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    Keywords

    tax shield; debt; risk; default; valuation;
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