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- Publisher
- Emerald Publishing
- Copyright
- Copyright © 2012 Emerald Group Publishing Limited. All rights reserved.
- ISSN
- 0307-4358
- DOI
- 10.1108/03074351211226229
- Publisher site
- See Article on Publisher Site
Abstract
Purpose – While an operation's unlevered value is objective, the value of the debt tax shield is subjective since it depends on the capital structure policy of the firm that owns the operation. The purpose of this paper is to explore the implications of this subjective nature of debt tax shield value for corporate investment decisions. Design/methodology/approach – The study develops a simple theoretical model. Findings – The paper shows that even a low probability of selling a project in the future to a firm with a different tax shield value can significantly affect a project's weighted average cost of capital (WACC) and total value. Practical implications – Managers should be aware of this issue when making corporate investment decisions. Originality/value – This is the first study to address the implication of the subjective nature of debt tax shield value.
Journal
Managerial Finance – Emerald Publishing
Published: May 4, 2012
Keywords: Tax shield; Cost of capital; Capital structure; Investments