The slicing approach to valuing tax shields
The literature develops the theoretical rationale for the Value of Tax Shields (VTS) on the following misguided basis: it uses required rate of return on assets (or WACC) as the discount rate for capitalization, it uses expected rate of return on assets ( ROA ¯ or ROI ¯ ) as a proxy for WACC, and it...
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| Veröffentlicht in: | Journal of banking & finance 2009-06, Vol.33 (6), p.1069-1078 |
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| container_issue | 6 |
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| container_title | Journal of banking & finance |
| container_volume | 33 |
| creator | Liu, Yuan-Chi |
| description | The literature develops the theoretical rationale for the Value of Tax Shields (VTS) on the following misguided basis: it uses required rate of return on assets (or WACC) as the discount rate for capitalization, it uses expected rate of return on assets (
ROA
¯
or
ROI
¯
)
as a proxy for WACC, and it is not aware of (1) the influence of the difference between “expected rate of return on equity” and “Required rate of Return On Equity (RROE)” on VTS, (2) the fact that RROE is equity normal profit which is not measurable, (3) the economic content of the weight attached to the VTS capacity, and (4) the co-definition of “tax shield and leverage return.” This paper takes tax shields and leverage return as a system and provides a knife, “interest rate/ROI
=
Cost/Price”, to slice the VTS capacity into “earned VTS” and “unearned VTS.” Earned VTS is VTS. Unearned VTS is the value of leverage return, because leverage return is tax payable. |
| doi_str_mv | 10.1016/j.jbankfin.2008.12.002 |
| format | Article |
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ROA
¯
or
ROI
¯
)
as a proxy for WACC, and it is not aware of (1) the influence of the difference between “expected rate of return on equity” and “Required rate of Return On Equity (RROE)” on VTS, (2) the fact that RROE is equity normal profit which is not measurable, (3) the economic content of the weight attached to the VTS capacity, and (4) the co-definition of “tax shield and leverage return.” This paper takes tax shields and leverage return as a system and provides a knife, “interest rate/ROI
=
Cost/Price”, to slice the VTS capacity into “earned VTS” and “unearned VTS.” Earned VTS is VTS. Unearned VTS is the value of leverage return, because leverage return is tax payable.</description><identifier>ISSN: 0378-4266</identifier><identifier>EISSN: 1872-6372</identifier><identifier>DOI: 10.1016/j.jbankfin.2008.12.002</identifier><identifier>CODEN: JBFIDO</identifier><language>eng</language><publisher>Amsterdam: Elsevier B.V</publisher><subject>Capital returns ; Discount rates ; Expectation ; Expected returns ; Fiscal theory ; Leverage ; Leverage return ; Measurement ; Profit ; Required rate of return ; Return on assets ; Studies ; Tax deductions ; Tax shields ; Tax shields Leverage return The VTS capacity Required rate of return ; The VTS capacity</subject><ispartof>Journal of banking & finance, 2009-06, Vol.33 (6), p.1069-1078</ispartof><rights>2009 Elsevier B.V.</rights><rights>Copyright Elsevier Sequoia S.A. Jun 2009</rights><lds50>peer_reviewed</lds50><woscitedreferencessubscribed>false</woscitedreferencessubscribed><citedby>FETCH-LOGICAL-c524t-8b39cd025b6a614b8de5f2db7671af55b3b3bbe3e59114fb23f3d9f2b24c33a53</citedby><cites>FETCH-LOGICAL-c524t-8b39cd025b6a614b8de5f2db7671af55b3b3bbe3e59114fb23f3d9f2b24c33a53</cites></display><links><openurl>$$Topenurl_article</openurl><openurlfulltext>$$Topenurlfull_article</openurlfulltext><thumbnail>$$Tsyndetics_thumb_exl</thumbnail><linktohtml>$$Uhttps://www.sciencedirect.com/science/article/pii/S0378426608002872$$EHTML$$P50$$Gelsevier$$H</linktohtml><link.rule.ids>314,776,780,3537,3994,27901,27902,65306</link.rule.ids><backlink>$$Uhttp://econpapers.repec.org/article/eeejbfina/v_3a33_3ay_3a2009_3ai_3a6_3ap_3a1069-1078.htm$$DView record in RePEc$$Hfree_for_read</backlink></links><search><creatorcontrib>Liu, Yuan-Chi</creatorcontrib><title>The slicing approach to valuing tax shields</title><title>Journal of banking & finance</title><description>The literature develops the theoretical rationale for the Value of Tax Shields (VTS) on the following misguided basis: it uses required rate of return on assets (or WACC) as the discount rate for capitalization, it uses expected rate of return on assets (
ROA
¯
or
ROI
¯
)
as a proxy for WACC, and it is not aware of (1) the influence of the difference between “expected rate of return on equity” and “Required rate of Return On Equity (RROE)” on VTS, (2) the fact that RROE is equity normal profit which is not measurable, (3) the economic content of the weight attached to the VTS capacity, and (4) the co-definition of “tax shield and leverage return.” This paper takes tax shields and leverage return as a system and provides a knife, “interest rate/ROI
=
Cost/Price”, to slice the VTS capacity into “earned VTS” and “unearned VTS.” Earned VTS is VTS. Unearned VTS is the value of leverage return, because leverage return is tax payable.</description><subject>Capital returns</subject><subject>Discount rates</subject><subject>Expectation</subject><subject>Expected returns</subject><subject>Fiscal theory</subject><subject>Leverage</subject><subject>Leverage return</subject><subject>Measurement</subject><subject>Profit</subject><subject>Required rate of return</subject><subject>Return on assets</subject><subject>Studies</subject><subject>Tax deductions</subject><subject>Tax shields</subject><subject>Tax shields Leverage return The VTS capacity Required rate of return</subject><subject>The VTS capacity</subject><issn>0378-4266</issn><issn>1872-6372</issn><fulltext>true</fulltext><rsrctype>article</rsrctype><creationdate>2009</creationdate><recordtype>article</recordtype><sourceid>X2L</sourceid><recordid>eNqFUE1L7DAUDaLg-PEXpLhwI-1Lctu03fkQ9QkDbnQdkvTWSe20NekMz3_vHcb3Fm5MOPdCOOfkcBi7EDwTXKhfXdZZM7y1fsgk51UmZMa5PGALUZUyVVDKQ7bgUFZpLpU6ZicxdpxOJWDBrp9XmMTeOz-8JmaawmjcKpnHZGv6ze5tNn-TuPLYN_GMHbWmj3j-tU_Zy_3d8-2fdPn08Hj7e5m6QuZzWlmoXcNlYZVRIrdVg0UrG1uqUpi2KCzQtQhY1ELkrZXQQlO30srcAZgCTtnV3pfSvG8wznrto8O-NwOOm6ihFAVALYl4-Y3YjZswUDYt6rwWsuIlkdSe5MIYY8BWT8GvTfjQgutdgbrT_wrUuwK1kJoKJOFyLww4ofuvQsTOEtforQYDQOODQMqalicowkQQXNX0Q1np1bwmu5u9HVJ1W49BR-dxcNj4gG7Wzeh_SvQJQ6KU9w</recordid><startdate>20090601</startdate><enddate>20090601</enddate><creator>Liu, Yuan-Chi</creator><general>Elsevier B.V</general><general>Elsevier</general><general>Elsevier Sequoia S.A</general><scope>DKI</scope><scope>X2L</scope><scope>AAYXX</scope><scope>CITATION</scope><scope>8BJ</scope><scope>FQK</scope><scope>JBE</scope></search><sort><creationdate>20090601</creationdate><title>The slicing approach to valuing tax shields</title><author>Liu, Yuan-Chi</author></sort><facets><frbrtype>5</frbrtype><frbrgroupid>cdi_FETCH-LOGICAL-c524t-8b39cd025b6a614b8de5f2db7671af55b3b3bbe3e59114fb23f3d9f2b24c33a53</frbrgroupid><rsrctype>articles</rsrctype><prefilter>articles</prefilter><language>eng</language><creationdate>2009</creationdate><topic>Capital returns</topic><topic>Discount rates</topic><topic>Expectation</topic><topic>Expected returns</topic><topic>Fiscal theory</topic><topic>Leverage</topic><topic>Leverage return</topic><topic>Measurement</topic><topic>Profit</topic><topic>Required rate of return</topic><topic>Return on assets</topic><topic>Studies</topic><topic>Tax deductions</topic><topic>Tax shields</topic><topic>Tax shields Leverage return The VTS capacity Required rate of return</topic><topic>The VTS capacity</topic><toplevel>peer_reviewed</toplevel><toplevel>online_resources</toplevel><creatorcontrib>Liu, Yuan-Chi</creatorcontrib><collection>RePEc IDEAS</collection><collection>RePEc</collection><collection>CrossRef</collection><collection>International Bibliography of the Social Sciences (IBSS)</collection><collection>International Bibliography of the Social Sciences</collection><collection>International Bibliography of the Social Sciences</collection><jtitle>Journal of banking & finance</jtitle></facets><delivery><delcategory>Remote Search Resource</delcategory><fulltext>fulltext</fulltext></delivery><addata><au>Liu, Yuan-Chi</au><format>journal</format><genre>article</genre><ristype>JOUR</ristype><atitle>The slicing approach to valuing tax shields</atitle><jtitle>Journal of banking & finance</jtitle><date>2009-06-01</date><risdate>2009</risdate><volume>33</volume><issue>6</issue><spage>1069</spage><epage>1078</epage><pages>1069-1078</pages><issn>0378-4266</issn><eissn>1872-6372</eissn><coden>JBFIDO</coden><abstract>The literature develops the theoretical rationale for the Value of Tax Shields (VTS) on the following misguided basis: it uses required rate of return on assets (or WACC) as the discount rate for capitalization, it uses expected rate of return on assets (
ROA
¯
or
ROI
¯
)
as a proxy for WACC, and it is not aware of (1) the influence of the difference between “expected rate of return on equity” and “Required rate of Return On Equity (RROE)” on VTS, (2) the fact that RROE is equity normal profit which is not measurable, (3) the economic content of the weight attached to the VTS capacity, and (4) the co-definition of “tax shield and leverage return.” This paper takes tax shields and leverage return as a system and provides a knife, “interest rate/ROI
=
Cost/Price”, to slice the VTS capacity into “earned VTS” and “unearned VTS.” Earned VTS is VTS. Unearned VTS is the value of leverage return, because leverage return is tax payable.</abstract><cop>Amsterdam</cop><pub>Elsevier B.V</pub><doi>10.1016/j.jbankfin.2008.12.002</doi><tpages>10</tpages></addata></record> |
| fulltext | fulltext |
| identifier | ISSN: 0378-4266 |
| ispartof | Journal of banking & finance, 2009-06, Vol.33 (6), p.1069-1078 |
| issn | 0378-4266 1872-6372 |
| language | eng |
| recordid | cdi_proquest_miscellaneous_37153392 |
| source | RePEc; Elsevier ScienceDirect Journals |
| subjects | Capital returns Discount rates Expectation Expected returns Fiscal theory Leverage Leverage return Measurement Profit Required rate of return Return on assets Studies Tax deductions Tax shields Tax shields Leverage return The VTS capacity Required rate of return The VTS capacity |
| title | The slicing approach to valuing tax shields |
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