Hence a positive relationship is expected between the Tax Shield
of the typical appointed actuary and reserve errors (i.e., overreserving with higher tax shields
While the focus originally was on the risk of debt tax shields
, Lessard (1979) recommends also to separate out depreciation tax shields
The assumption of a return to normal weather partially offsets tax reform headwinds, such as lower utility cash flows, lower tax shields
on holding company debt and equity dilution for some companies.
effects as well as distress costs effects are explicitly included in the WACC formula.
Elliott claims the company could create over $22B in value through a unification at a cost under $400M, however BHP argues the fund is taking "a particularly optimistic view" and calculates the cost at over $1B due to the loss of tax shields
and higher taxes in Singapore, where it sells most of its commodities.
Additionally, AT1 is a way of raising non-dilutive capital which would be the case if common equity were issued, and in jurisdictions where debt issuance benefits from tax shields
(Asia and Europe), it can be classified as long-term debt.
Trade-off theory that stemmed from the original Modigliani-Miller (1958) irrelevance theorem assumes that the firm trades off the cost and benefit associated debt and equity financing and finds an optimal capital structure while taking into consideration the advantages of tax shields
, agency costs and bankruptcy costs.
The expected bankruptcy costs are lower and interest tax shields
are more valuable for profitable firms.
The most important are size, profitability, growth, risk (expressed in the volatility of the operating performance), asset structure (expressed in the level of the tangibility of assets) and non-debt tax shields
. Hypothetically, these firm-specific attributes, along with the external (country-specific and industry-specific) factors should convincingly and to a large degree explain the capital structure patterns observed in firms.
Further work by Miller (1977) introduces corporate taxes, personal taxes on capital gains, and personal taxes on interest incomes, while DeAngelo and Masulis (1980) introduces non-interest, tax exempted expenses like depreciation and investment credit taxes as non-debt tax shields
. Further theoretical development includes Trade-off Theory, which emphasizes trade-off between tax benefits of debt to debt related probable financial distress.
Other control variables include size, growth, profitability, tangibility, age, earnings variability, debt service capacity, dividend payout ratio, non-debt tax shields
, degree of operating leverage, price-earnings ratio, promoter shareholdings, tax rate and uniqueness.