The Correct Value of Tax Shields. An Analysis of 23 Theories

This paper provides clear, theoretically sound, guidelines to evaluate the appropriateness of 23 different valuation methods to estimate the present value of tax shields. We first show that the value of tax shields is the difference between the present values of two different cash flows with their own risk: the present value of taxes for the unlevered company and the present value of taxes for the levered company. This implies…