A model for risky cash flows and tax shields

Howard Qi; Sheen Liu; Dean Johnson

doi:10.1007/s12197-010-9162-7

A model for risky cash flows and tax shields

Howard Qi, Sheen Liu, Dean Johnson

Research output: Contribution to journal › Article › peer-review

3 Scopus citations

Abstract

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 language	English (US)
Pages (from-to)	868-881
Number of pages	14
Journal	Journal of Economics and Finance
Volume	36
Issue number	4
DOIs	https://doi.org/10.1007/s12197-010-9162-7
State	Published - Oct 2012
Externally published	Yes

Keywords

APV
Risky Cash Flows
Tax Shields
WACC

ASJC Scopus subject areas

Finance
Economics and Econometrics

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10.1007/s12197-010-9162-7

Cite this

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abstract = "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.",

keywords = "APV, Risky Cash Flows, Tax Shields, WACC",

author = "Howard Qi and Sheen Liu and Dean Johnson",

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AB - 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.

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KW - Risky Cash Flows

KW - Tax Shields

KW - WACC

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A model for risky cash flows and tax shields

Abstract

Keywords

ASJC Scopus subject areas

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