valueofthefirm.Thequestion,ofcourse,ishowbesttobuild
theeffectsintothecashflows.Perhapsthesimplestapproach
istofirst valuethefirm,ignoringthetaxsubsidies,andto
then add on the value increment from the subsidies.
Forinstance,assumethatyouarevaluingapharmaceutical
firmwithoperationsinPuertoRico,whichentitlethefirmto
a taxbreakin theformof alower taxrateontheincome
generatedfrom theseoperations.Youcouldvalue thefirm
usingitsnormalmarginaltaxrate,andthenaddtothatvalue
thepresentvalueofthetaxsavingsthatwillbegeneratedby
thePuertoRicanoperations.Therearethreeadvantageswith
this approach:
1.Itallowsustoisolatethetaxsubsidyandconsideritonly
for theperiodover which we areentitled to it. Whenthe
effectsofthesetaxbreaksareconsolidatedwith othercash
flows, there is a danger that they will be viewed as
perpetuities.
2.Thediscountrateusedtocomputethetaxbreakscanbe
differentfromthediscountrateusedontheothercashflows
ofthefirm.Thus,ifthetaxbreakisaguaranteedtaxcreditby
thegovernment,wecoulduseamuchlowerdiscountrateto
compute the present value of the cash flows.
3.Buildingonthethemethattherearefewfreelunches,itcan
be argued that governments provide tax breaks for
investmentsonlybecausefirmsareexposedtohighercostsor
moreriskintheseinvestments.Byisolatingthevalueofthe
tax breaks, firms can then consider whether the trade-off
operates in their favor. For example, assume that a sugar
manufacturerisofferedataxcreditforbeinginthebusiness