Capital Cash Flows: A Simple Approach to Valuing Risky Cash Flows

Abstract

This paper presents the Capital Cash Flow method for valuing risky cash flows.

The slicing approach to valuing tax shields

“…Extant literature already is aware of lost tax benefits. Ruback (2002) presents the Capital Cash Flow method and claims that the appropriate discount rate is the required rate of return on assets or WACC. Fernandez (2004) proposes ''The value of tax shields is the difference between the present values of two different cash flows: the present value of taxes for the un-levered company and the present value of taxes for the levered company."…”

The effect of leverage on the cost of capital of US buyouts

“…The risk of not being able to fully exploit the advantage from debt finance is then as high as the risk of obtaining the income itself and hence, the appropriate discount rate for the tax benefits equals the unlevered cost of capital. In this case, Ruback (2002) proposes the following relation:…”

Value and capacity of tax shields: An analysis of the slicing approach

“…We refrain from exploring these further subtleties in this research. For interested readers, we refer to studies such as Ferná-ndez (2004Ferná-ndez ( , 2005Ferná-ndez ( , 2006, Qi (2010), Nyborg (2006, 2007), Ruback (2002), and Booth (2002Booth ( , 2007, among many others.…”

“…Once the situation becomes even somewhat realistic, controversies immediately emerge. See, for example, Fernández (2004Fernández ( , 2005Fernández ( , 2006, Nyborg (2006, 2007), Ruback (2002), Booth (2002Booth ( , 2007, Sabal (2005Sabal ( , 2007, Qi (2010), Pereiro (2002), Johnson and Qi (2008), and Graham (2000), among many, regarding how to value tax shields under a variety of circumstances.…”