Calculation of Tax Shields Using the Method of Adjusted Present Value

Conference paper
Part of the Springer Proceedings in Business and Economics book series (SPBE)

Abstract

A tax shield is a reduction in taxable income for an individual or corporation achieved through claiming allowable deductions such as mortgage interests, medical expenses, charity donations, amortization, and depreciation. These deductions reduce a taxpayer’s taxable income for a given year or defer income taxes into future years. Interest expense is, as opposed to dividends and capital gains, tax deductible; therefore the tax shield (being a benefit of debt financing over equity financing) is an important factor influencing the company’s capital structure choice. The contribution presents basic methods of the tax shield calculations with a practical application of a chosen method in conditions of the Slovak construction company to illustrate and explain the tax shields determination.

Notes

Acknowledgments

The contribution is an output of the scientific project VEGA 1/0428/17 and creation of new paradigms of financial management at the threshold of the twenty-first century in the conditions of the Slovak Republic.

References

  1. Arzac, E. R., & Glosten, L. R. (2005). A Reconsideration of Tax Shield Valuation. European Financial Management, 11, 453–461.CrossRefGoogle Scholar
  2. Bartošová, V., & Kral, P. (2016). A methodological framework of financial analysis results objectification in the Slovak Republic. In 3rd international conference on business and economics, European proceedings of social and behavioural, Future ACAD, Nicosia, 21–23 Sept 2016.Google Scholar
  3. Buus, T., Strouhal, J., & Brabanec, T. (2007). Aplikace moderních metod oceňování v případe nekotovaných společností. Oeconomica, Praha.Google Scholar
  4. Cernikova, M., & Malikova, O. (2013). Capital structure of an enterprise – Open questions regarding its displaying under the Czech Legislative conditions. In 11th international conference on Liberec Economic Forum, Sychrov, Czech Republic, 16–17 Sept 2013.Google Scholar
  5. Copeland, T. E., Koller, T., & Murrin, J. (2000). Valuation: Measuring and managing the value of companies. New York: Wiley.Google Scholar
  6. Damodaran, A. (2004). Damodaran on valuation. New York: Wiley.Google Scholar
  7. Fernandez, P. (2007). Valuing companies by cash flow discounting: 10 methods and 9 theories. Managerial Finance, 33, 853–876.CrossRefGoogle Scholar
  8. Harris, R. S., & Pringle, J. J. (1985). Risk-adjusted discount rates extensions form the average-risk case. Journal of Financial Research, 8, 237–244.CrossRefGoogle Scholar
  9. Hrvolova, B. (2006). Analýza finannčých trhov. Bratislava: Sprint.Google Scholar
  10. Kramarova, K., Gregova, E., & Cisko, S. (2014). Changes in the corporate tax in Slovakia - tax licence. In Business and management 2014 : The 8th international scientific conference: Selected papers. Vilnius, Lithuania, 15–16 May 2014.Google Scholar
  11. Michalkova, L. (2016). Tax shield validation method under the global conditions. In 16th international scientific conference on globalization and its socio-economic consequences. Rajecke Teplice, Slovakia, 5–6 Oct 2016.Google Scholar
  12. Miles, J. A., & Ezzell, J. R. (1980). The weighted average cost of capital, perfect capital markets and project life: A clarification. Journal of Financial and Quantitative Analysis, 15, 719–730.CrossRefGoogle Scholar
  13. Miller, M. H. (1977). Debt and taxes. Journal of Finance, 32, 261–276.Google Scholar
  14. Modigliani, F., & Miller, M. (1963). Corporate income taxes and the cost of capital: A correction. American Economic Review, 53, 433–443.Google Scholar
  15. Myers, S. C. (1974). Interactions of corporate financing and investment decisions –implications for capital budgeting. Journal of Finance, 29, 1–25.CrossRefGoogle Scholar
  16. Paliderova, M., Bielikova, A., & Spuchlakova, E. (2015). Application of tax bonus under the Slovak and Czech republic. Procedia – Economics and finance, 26, 404–410.CrossRefGoogle Scholar
  17. Ruback, R. (2002). Capital cash flows: A simple approach to valuing risky cash flows. Financial Management, 31, 85–103.CrossRefGoogle Scholar
  18. Stanton, R., & Seasholes, M. (2005). The assumptions and maths behind WACC and APV calculations. U.C. Berkley, Canada.Google Scholar

Copyright information

© Springer International Publishing AG, part of Springer Nature 2018

Authors and Affiliations

  1. 1.University of Zilina, Faculty of Operation and Economics of Transport and CommunicationsZilinaSlovak Republic

Personalised recommendations