Final answer:
The terminal value of interest tax shields should be included in valuation calculations as it represents the present value of future tax benefits of debt financing beyond the forecast period, influencing a firm's WACC and overall valuation.
Step-by-step explanation:
The terminal value of interest tax shields should indeed be included in the calculation when evaluating a company's enterprise value or conducting a discounted cash flow analysis. This value represents the present value of tax savings due to interest payments on debt extending beyond the forecast period. Including the terminal value of interest tax shields ensures that the valuation captures all the benefits of debt financing that would accrue to the company in perpetuity, assuming the company maintains a consistent capital structure.
Including interest tax shields in your calculations reflects the tax advantage of debt financing. Firms receive a tax deduction for interest payments, which lowers their taxable income and effectively reduces the cost of debt compared to equity. This aspect is important in corporate finance because it influences a firm's weighted average cost of capital (WACC) and its valuation. For a correct assessment, all future tax shields that a firm is expected to generate should be considered.