In the literature this incentive is measured as the value of the
tax shield (Grace, 1990):
Non-debt
tax shield (NDTS) includes tax advantages a firm received on some sort of investment.
There are some peripheral reasons for this situation like the lack of
tax shield in the region that makes debt less attractive here than in countries with higher levels of interest taxation.
Our analysis, considering bankruptcy costs, reaches a similar conclusion when a dividend
tax shield is allowed.
The fundamental scenario that previous studies used is this: A long-term mortgage borrower can save the interest
tax shield as well as the difference in payments, but a short-term mortgage borrower can start saving after paying off the loan.
To follow it, we first evaluate the project as if an all-equity company were considering it, so we ignore financing side-effects such as the
tax shield on debt.
Static trade off theory defines optimal capital structure as a balance between the
tax shield benefits derived from debt and the costs of financial distress.
To proxy other control variables, financial ratios such as return on assets (ROA) (profitability), market to book value (growth potential), non debt
tax shield, size (LN(TA)), rate of outstanding shares (use of capital market), total assets growth (growth) and long term asset to total assets (Tangibility of assets) are also used.
Total cost differential between old and new systems will also include depreciation
tax shield allowed for the new equipment.
The amortization expense creates a
tax shield for the acquirer, enhancing the cash flow and value of the reporting unit.
In other words, a firm could never pay the accrued interest and still retain the right to the
tax shield.
3bn with direct inflows in Italy adding EUR314m, mostly in the final quarter, and partly helped by Italy's
tax shield policy.
