Company Valuation after the German Tax Reform 2008 : Implications for the Tax Shield from Debt Financing

The value of a levered firm depends to a large extent upon the value of the tax shields. The German Corporate Tax Reform Act 2008 changes the tax system dramatically and introduces a new ceiling for the tax-deduction of interest payments. A central objective of this reform has been the tax neutrality of financing. In this paper we analyze whether this goal was achieved. We determine the tax shield from debt financing for German corporations for the new and old tax system. In comparing the two, we conclude that the reform has largely increased rather than decreased the advantages of debt financing