A General Framework for Tax Shield Valuation

<p>This study develops a general valuation framework that delivers internally consistent valuations for all forms of firm capital and for the tax shield associated with their combination. This consistency is achieved by incorporating the interdependence among the components of a levered firm’s cash flows. The study reexamines classical tax shield valuation models within the same framework and clarifies the conditions under which each arises as a special case. A central finding is that these models depend not only on stated assumptions but on an implicit assumption that debt is risk-free. This hidden assumption is more restrictive than it may appear.</p>