Abstract
Due to the future tax savings they provide tax loss carryforwards (TLCs) may contribute significantly to the value of a corporation. The valuation of a TLC is rather complex as the tax savings attached to it are path-dependent. We employ different valuation techniques proposed in the literature and find (not surprisingly) that only the risk-neutral valuation based on a binomial tree is able to fully capture the effects of the path-dependency upon the TLC's value. Other valuation procedures proposed by literature, including the risk adjusted discounting of expected tax savings based on the firm's cost of equity, yield deviations from the correct results. Based on Monte Carlo Simulation models we also find the magnitude of these deviations to depend especially on the risk of the future earnings and the lifetime of the TLC.
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