A model for risky cash flows and tax shields

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We extend the WACC and APV frameworks by incorporating risky cash flows and the potential loss of tax shields. A closed-form solution is derived for the expected effective tax shields. Our model explains the under-leverage puzzle, and provides better estimates for the required equity return through the improved WACC and APV formulae. It offers four empirically testable predictions.

Publisher's Statement

© Springer Science+Business Media, LLC 2010. Publisher's version of record: https://dx.doi.org/10.1007/s12197-010-9162-7

Publication Title

Journal of Economics and Finance