Risky Tax Shields and Risky Debt

Abstract (via Ignacio Velez-Pareja )

I present a set of conditions for defining risky debt associated to cash flow and not to accounting earnings. I explain why realization of tax shields for finite cash flows in any period of time t are correlated to Earnings before Interest and Taxes and are not correlated to interest expenses at time t.

Using Monte Carlo Simulation I explore the behavior of the four basic cash flows, Earnings before Interest and Taxes plus Other income OI, and interest charges, with eight scenarios applied to a financial planning model. I conclude that the risk of tax shields is Ku, the unlevered cost of equity

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24. July 2010 by Miguel Barbosa
Categories: Curated Readings, Finance & Investing | Leave a comment

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