A Note on the Valuation of the Corporate Debt Tax Shield

This note revisits the valuation of the tax shield of corporate borrowing when borrowing is not linked to enterprise value. In this case past literature has typically discounted the tax shield at the cost of borrowed capital gross of corporate tax, not net of corporate tax. Yet the latter often provides useful simplifications: the book value and the fundamental value of borrowings are often close; under the standard assumption that future borrowings are zero-net-present-value transactions, the tax shield due to future borrowings need not be explicitly forecasted and valued; levered equity value is simply equal to unlevered equity value minus the value of current borrowings.Finally, there seems to be no obvious way to correctly use the after-tax weighted average cost of capital in valuations of levered equity