Cost of Equity and Tax Shields : General Framework

We provide a simple derivation of the weighted average cost of capital and relation between the cost of equity levered and unlevered. We come to the same conclusions about the formula of weighted average cost of capital and cost of levered and unlevered equity as we would if we assumed constant growth rates. Further we analyze the relationship between cash flows definition and cost of tax shield. We find that the exact risk profile of cost of tax shield and its relation to the risk profile of debt depends upon design of interest payments, pledges in favor of creditors, etc. Thus we cannot say anything exact and general about the cost of tax shield. We cannot equate them generally to the cost of any of the sorts of capital. More research is probably needed to examine the nature and value of cost of tax shield