Tax Shields in an LBO

Loeffler, Andreas

doi:10.2139/ssrn.217148

Cited by 4 publications

(3 citation statements)

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“…Although a number of publications about financing based on market values later appeared (Harris and Pringle (1985) and Clubb and Doran (1995) are mentioned here as representative), they do not deal with any new financing. Financing based on cash flows was considered in Arzac (1996) and Löffler (2000).…”

Section: Further Literaturementioning

confidence: 99%

Corporate Income Tax: WACC, FTE, TCF, APV

Kruschwitz

Löffler

2020

Springer Texts in Business and Economics

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There is a variety of problems in the valuation of firms. That is why the evaluator has to make some simplifications in order to come up with a result. That also goes for the theory of valuation. We will take the first step in assuming that the firm has no debt. In simplifying with this assumption, we shall see that a number of economic problems can be discussed. In the next step we will turn to indebted firms. 3.1 Unlevered Firms Whoever has to value levered firms, also has to be able to value unlevered firms. Both are mutually conditional. By itself, this claim does not shed any light. It should be understood that if a levered firm is spoken of without naming any further details, then that remains unclear. Are we dealing with a heavily or only moderately levered firm? Will the firm's debt increase, or are the responsible managers planning to reduce the firm's credit volume? In contrast to a levered firm in which this must all be explained in detail, the circumstances of an unlevered firm are clear and simple. When we speak of an unlevered firm, we mean a firm, which will not have debts today, nor anytime in the future. Of course it is difficult to believe that there are actually such firms in our world. But this-no doubt fully correct assessment-does not matter here. All we want to state is that what we mean by an unlevered firm is completely straightforward, while by a levered firm it is not so clear without further information. Cost of Capital and Leverage A firm's cost of capital essentially depends upon two influences: firstly, the firm's business risk, and secondly, its indebtedness. It is fundamentally valid that the greater the risk is and the greater the firm's debt-equity ratio is, that much higher the expected returns are. And if we make the connection between this law and the considerations of the preceding paragraph, then the cost

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Section: Further Literaturementioning

confidence: 99%

Corporate Income Tax: WACC, FTE, TCF, APV

Kruschwitz

Löffler

2020

Springer Texts in Business and Economics

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“…There are no approaches developed yet that allow to treat these cases, in which the riskiness of the tax shield is not easily determined. E.g., [20] derives the value of the tax shield in the special case of a levered buyout using a Martingale-process. n See [18].…”

Section: Financing Strategies and The Cost Of Capitalmentioning

confidence: 99%

“…Therefore, the increase in debt is polyvalent and as uncertain as the cash flows, unless the firm would, at the date of valuation, agree by contract, or otherwise, to a level of debt equal to the expected value. To date, the existing literature does, to our knowledge, not yet provide an approach for modeling capital structures planned in book values [5,18,20,31]. One first step in this direction is to take periodically adjusted cost of capital rates into consideration.…”

Section: (331)mentioning

confidence: 99%

Valuation, Tax Shields and the Cost-of-Capital With Personal Taxes: A Framework for Incorporating Taxes

Schultze

2004

Int. J. Theor. Appl. Finan.

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This paper presents a general approach to deriving valuation models and the relevant cost of capital formulas independent of a particular tax environment. The value of a levered firm depends to a large extent upon the amount and value of the tax shields. The latter in turn differs from country to country and even from firm to firm, depending on its particular situation. It is subject to change with every change in the tax system of the country where the firm is located. Therefore, in an international environment a general approach is needed, which can be altered for any given situation. At the same time personal taxes play an increasing role in the valuation of companies. Therefore, their consideration is integrated into the models derived. Finally, the resulting generalized versions of the Modigliani/Miller-and Miles-Ezzell-Formulas for adjusting the cost of capital to changes in leverage are applied to the situation of a corporation located in Germany after the Tax Reform Act of 2000.

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Corporate Income Tax

Kruschwitz¹,

Löffler²

2005

Discounted Cash Flow

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Remark: The slightly expanded second edition (Springer, open access) has different enumeration than the first (Wiley). We use Springer's enumeration in the slides and Wiley's in the videos. , Outline 3.1 Unlevered firms Similar companies Notation 3.1.1 Valuation equation 3.1.2 Weak autoregressive cash flows Independent and uncorrelated increments Gordon-Shapiro Discount rates 3.1.3 Example (continued) The finite case The infinite case , The unlevered firm 1 Companies are indebted, i.e. levered. Why should we consider unlevered firms, i.e. firms without debt? Valuation requires knowledge of ▶ cash flows ⇐= from business plans, annual balance sheets etc.

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Tax Shields in an LBO

Cited by 4 publications

References 13 publications

Corporate Income Tax: WACC, FTE, TCF, APV

Corporate Income Tax: WACC, FTE, TCF, APV

Valuation, Tax Shields and the Cost-of-Capital With Personal Taxes: A Framework for Incorporating Taxes

Corporate Income Tax

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