Calculation of Tax Shields Using the Method of Adjusted Present Value
A tax shield is a reduction in taxable income for an individual or corporation achieved through claiming allowable deductions such as mortgage interests, medical expenses, charity donations, amortization, and depreciation. These deductions reduce a taxpayer’s taxable income for a given year or defer income taxes into future years. Interest expense is, as opposed to dividends and capital gains, tax deductible; therefore the tax shield (being a benefit of debt financing over equity financing) is an important factor influencing the company’s capital structure choice. The contribution presents basic methods of the tax shield calculations with a practical application of a chosen method in conditions of the Slovak construction company to illustrate and explain the tax shields determination.
The contribution is an output of the scientific project VEGA 1/0428/17 and creation of new paradigms of financial management at the threshold of the twenty-first century in the conditions of the Slovak Republic.
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