Saturday, April 1, 2017

present value - Why is PV(tax shield) calculated using cost of debt capital for discounting?


I understand that (interest payment)×(corporation tax) is the cash flow saving (assumed to go on in perpetuity) and it can be written as (debt)×(cost of debt capital)×(corporation tax). But why is it discounted with cost of debt capital? If it is a cash outflow saving on the whole operation of the company, why isn't is discounted with WACC?




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