A Simple Accounting-Based Valuation Model for the Debt Tax Shield

Paper Details

Authors:

DOI: 10.1007/BF03342714

Journal: Business Research

Year: 2010

Publisher: Springer

Document Type: Article

Open Access: All Open Access; Gold Open Access; Green Open Access

Cited by: 3

Abstract

This paper describes a simple way to integrate the debt tax shield into an accounting-based valuation model. The market value of equity is determined by forecasting residual operating income, which is calculated by charging operating income for the operating assets at a required return that accounts for the tax benefit that comes from borrowing to raise cash for the operations. The model assumes that the firm maintains a deterministic financial leverage ratio, which tends to converge quickly to typical steady-state levels over time. From a practical point of view, this characteristic is of particular help, because it allows a continuing value calculation at the end of a short forecast period. © 2010, The Author(s).

Keywords

corporate income tax; cost of capital; debt tax shield; equity valuation; Feltham-Ohlson framework; financial leverage; financial statement analysis; residual income valuation

Read Paper Back to Search