Page 126 - Bankruptcy and Reorganization Services

years but is not eliminated by the interest expense. The interest expense defers the utilization of
an NOL, but it does not eliminate the tax benefit of an NOL. The NOL may be lost, however, if
not utilized within the statutory time limit.

3. The presence of interest expense defers the utilization of an NOL, thus reducing the present value
of the tax benefit of the NOL. Interest expense also increases the risk that the NOL will not be
fully utilized within the statutory time limit. The tax benefit of an NOL is realized only if income
exists after interest expense has been paid. According, the riskiness of the tax benefit of an NOL
is similar to the riskiness of equity.

4. The presence of leverage affects the utilization of the NOL. If the discounted cash flow (DCF) is
based on asset cash flows, as opposed to equity cash flows, then the utilization of the NOL with-
in the DCF projections will not reflect the actual utilization of the NOL. A preferred approach
would be to value the HOL in a separate DCF calculation that models the actual NOL utilization
more accurately.

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