A model for risky cash flows and tax shields

Howard Qi, Sheen Liu, Dean Johnson

Research output: Contribution to journalArticlepeer-review

3 Scopus citations


We extend the WACC and APV frameworks by incorporating risky cash flows and the potential loss of tax shields. A closed-form solution is derived for the expected effective tax shields. Our model explains the under-leverage puzzle, and provides better estimates for the required equity return through the improved WACC and APV formulae. It offers four empirically testable predictions.

Original languageEnglish (US)
Pages (from-to)868-881
Number of pages14
JournalJournal of Economics and Finance
Issue number4
StatePublished - Oct 2012
Externally publishedYes


  • APV
  • Risky Cash Flows
  • Tax Shields
  • WACC

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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