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

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...

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Bibliographic Details
Published in:Business Research 2010-05, Vol.3 (1), p.37-47
Main Author: Scholze, Andreas
Format: Article
Language:English
Subjects:
Accounting
Accounting/Auditing
Business and Management
Business Strategy/Leadership
Business valuation
Corporate Finance
Financial statement analysis
Marketing
Studies
Tax benefits
Tax shelters
Valuation methods
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Summary: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.
ISSN:2198-3402
1866-8658
2198-2627
DOI:10.1007/BF03342714