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

Die Betriebswirtschaft (DBW), Vol. 68, No. 1, pp. 9-34, 2008

Posted: 3 Apr 2010

See all articles by Carmen Bachmann

Carmen Bachmann

University of Augsburg - Faculty of Business and Economics

Wolfgang Schultze

University of Augsburg

Date Written: November 19, 2007

Abstract

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.

Keywords: Cost of Capital, Tax Shield, Valuation

JEL Classification: G31, G34

Suggested Citation

Bachmann, Carmen and Schultze, Wolfgang, Company Valuation after the German Tax Reform 2008: Implications for the Tax Shield from Debt Financing (November 19, 2007). Die Betriebswirtschaft (DBW), Vol. 68, No. 1, pp. 9-34, 2008, Available at SSRN: https://ssrn.com/abstract=1580030

Carmen Bachmann

University of Augsburg - Faculty of Business and Economics ( email )

Augsburg, 86135
Germany

Wolfgang Schultze (Contact Author)

University of Augsburg ( email )

Augsburg, 86135
Germany

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