Real Options and the value of tax savings
DOI:
https://doi.org/10.24215/23143738e063Keywords:
tax shield, sensitive analysis, binomial modelAbstract
In the traditional version of the discounted cash flow model, the contingent values of tax savings are not considered, assuming, instead, deterministic values for tax shields. In this sense, this paper proposes a model that incorporates the contingent nature of tax savings in relation to the degree of leverage and expected profits. Using the Options Theory as a basis, the valuation model for tax savings is developed. Next, through the case and sensitive analyses of the profits, the main results are achieved. The contingent nature of tax savings in the firm’s value is evidenced, avoiding the discussion about tax shield interest rates.
Downloads
Metrics
References
Booth, L. (2002). Finding Value Where None Exists: Pitfalls in Using Adjusted Present Value. Journal of Applied Corporate Finance, 15(1), 8-17.
Booth, L. (2007). Capital Cash Flow, APV and Valuation. European Financial Management, 13(1), 29-48.
Castro Monge, E. (2010). El estudio de casos como metodología de investigación y su importancia en la dirección y administración de empresas. Revista Nacional de Administración, 2(1), 31-54.
Chance, D. (2007). A Synthesis of Binomial Option Pricing Models for Lognormally Distributed Assets. SSRN, 1-25. http://dx.doi.org/10.2139/ssrn.969834.
Cooper, I. y Nyborg, K. (2006). The Value of Tax Shields IS Equal to the Present Value of Tax Shields. Journal of Financial Economics, 81, 215-225.
Copeland, T., Koller, K. y Murrin, J. (2000). Valuation: Measuring and Managing the Value of Companies (3 ed.). New York: Wiley.
Cox, J., Ross, S. y Rubinstein, M. (1979, Septiembre). Option Pricing: A Simplified Approach. Journal of Financial Economics, 7, 229-263.
Damodaran, A. (2006). Damodaran on Valuation (2 ed.). New York, United State: John Wiley & Sons.
Farber, A., Gillet, R. y Szafarz, A. (2006). A General Formula for the WACC. International Journal of Business, 11(2), 211-218.
Fernández, P. (2014). Valoración de Empresas y Sensatez (Tercera ed.). Barcelona : IESE Business School-Universidad de Navarra .
Gisiger, N. (2010). Risk-Neutral Probabilities Explained. SSRN. http://dx.doi.org/10.2139/ssrn.1395390
Guimaraes Dias, M. (2015). Análise de Investimentos com Opcoes Reais. Rio de Janeiro, Brasil: Editora Interciencia Ltda.
Inselbag, I. y Kaufold, H. (1997). Two DCF Approaches for Valuing Companies under Alternative Financing Strategies and How to Choose between Them. Journal of Applied Corporate Finance, 10, 114-122.
León, A. , Mencia, J. y Sentaria, E. (2007). Parametric Properties of Semi-Nonparametric Distributions, with application to Options Valuation. Documento de Trabajo 0707 Banco de España, 9-30.
Milanesi, G. (2013). Asimetría y Curtosis en el Modelo Binomial para valora Opciones Reales: caso de aplicación para empresas de base tecnológica. Estudios Gerenciales Journal of Management and Economics for Iberoamerica, 29(128), 368-378.
Milanesi, G. (2014). Momentos estocásticos de orden superior y la estimación de la volatilidad implícita: aplicación de la expansión de Edgeworth en el modelo Black-Scholes. Estudios Gerenciales, 30, 336–342.
Milanesi, G. y El Alabi, E. (2018). A binomial model with Edgeworth expansion on particular circumstances. European Accounting and Management Review, 5(1), 69-93.
Miles, J. y Ezzell, J. (1980). The Weighted Average Cost of Capital, Perfect Capital Markets and Project Life: A Clarification. Journal of Financial and Quantitative Analysis, 15, 719-730.
Miles, J. y Ezzell, J. (1985). Reformulation Tax Shield Valuation: A note. Journal of Finance, 40, 1485-1492.
Modigliani, F. y Miller M. (1963, Junio). Corporate Taxes and Cost of Capital. American Economic Review, 53(3), 433-443.
Oded, J. y Michel,A. (2007). Reconciling Valuation DCF Methodologies. Journal of Applied Finance, 17(2), 21-32.
Ruback, R. (2002). Capital Cash Flows: A simple approach to valuing risky cash flows. Financial Management, 31(2), 85-103.
Taggart, R. (1991). Consistent Valuation and Cost of Capital Expressions with Corporarte and Personal Taxes. Financial Management, 20, 8-20.
Tham, J. y Velez Pareja, I. (2001). The Correct Discount Rate for the Tax Shield: the N-Period Case. Working Paper submitted to the European Financial Management Association.
Tham, J. y Wonder, N. (2001). Unconventional wisdom on PSI, the appropriate discount rate for the tax shield. SSRN. http://dx.doi.org/10.2139/ssrn.282149
Tham, J. y Wonder, N . (2002). Inter-temporal resolution of risk: The case of the tax shield . SSRN. http://dx.doi.org/10.2139/ssrn.308039
Velez Pareja, I. (2016). Tax shields, financial expenses and losses carried forward. Cuadernos de Economia, 35(69), 663-689.
Downloads
Additional Files
Published
How to Cite
Issue
Section
License
Those authors who have publications with this journal, agree with the following terms:
a. Authors will retain its copyright and will ensure the rights of first publication of its work to the journal, which will be at the same time subject to the Creative Commons Atribución-NoComercial-CompartirIgual 4.0 Internacional (CC BY-NC-SA 4.0) allowing third parties to share the work as long as the author and the first publication on this journal is indicated.
b. Authors may elect other non-exclusive license agreements of the distribution of the published work (for example: locate it on an institutional telematics file or publish it on an monographic volume) as long as the first publication on this journal is indicated,
c. Authors are allowed and suggested to disseminate its work through the internet (for example: in institutional telematics files or in their website) before and during the submission process, which could produce interesting exchanges and increase the references of the published work. (see The effect of open Access)
