Value and capacity of tax shields: An analysis of the slicing approach

Correctly valuing tax shields has been a challenge in corporate valuation. A recent study by Liu (2009) introduces the slicing approach to separating the tax shield into the earned and unearned parts. Liu also shows that the MM results are wrong, and claims that the slicing approach has finally resolved the issue of pricing tax shields, thereby bringing closure to the topic. However, through careful analysis, we refute Liu’s main claims and restore the MM results. There are still open questions and the topic is not completely resolved as claimed in Liu (2009).