[Journal:] BuR - Business Research [ISSN:] 1866-8658 [Volume:] 3 [Year:] 2010 [Issue:] 1 [Pages:] 37-47
This paper describes a simple way to integrate the debt tax shield into an accounting-based valuation model. The market value of equity is determined by forecasting residual operating income, which is calculated by charging operating income for the operating assets at a required return that accounts for the tax benefit that comes from borrowing to raise cash for the operations. The model assumes that the firm maintains a deterministic financial leverage ratio, which tends to converge quickly to typical steady-state levels over time. From a practical point of view, this characteristic is of particular help, because it allows a continuing value calculation at the end of a short forecast period.
corporate income tax cost of capital debt tax shield equity valuation financial leverage financial statement analysis residual income valuation Feltham-Ohlson framework