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Consistent valuation and Cost of Capital Expressions With Corporate and Personal Taxes

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Author Info
Robert A. Taggart
Jr.
Abstract

The conditions under which the adjusted present value, adjusted discount rate and flows to equity valuation methods all lead to identical asset values in the presence of corporate and personal taxes are examined. Three distinct sets of valuation and cost of capital expressions are derived corresponding to different assumptions about the risk and time pattern of an asset's interest tax shields. To achieve identical valuations, the analyst must remain within one of these sets of expressions. While it is possible to achieve consistent valuation in most cases, however, it is often cumbersome to implement one or more of the valuation methods. Suggestions are offered for choosing the preferred valuation method in different circumstances.

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Publisher Info
Article provided by Financial Management Association in its journal Financial Management.

Volume (Year): 20 (1991)
Issue (Month): 3 (Fall)
Pages:
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Handle: RePEc:fma:fmanag:taggart91

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  1. Cooper, Ian & Nyborg, Kjell G, 2005. "The Value of Tax Shields IS Equal to the Present Value of Tax Shields," CEPR Discussion Papers 5182, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  2. Fernandez, Pablo, 2007. "A more realistic valuation: APV and WACC with constant book leverage ratio," IESE Research Papers D/715, IESE Business School. [Downloadable!]
  3. Ignacio Vélez–Pareja & Rauf Ibragimov & Joseph Tham, 2008. "Constant Leverage And Constant Cost Of Capital: A Common Knowledge Half-Truth," ESTUDIOS GERENCIALES, UNIVERSIDAD ICESI. [Downloadable!]
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  4. Löffler, Andreas, 2002. "Miles-Ezzell's WACC Approach Yields Arbitrage," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover dp-248, Universität Hannover, Wirtschaftswissenschaftliche Fakultät. [Downloadable!]
  5. Fernández, Pablo, 1999. "Equivalence of the different discounted cash flow valuation methods. Different alternatives for determining the discounted value of tax shields and their implications for the valuation," IESE Research Papers D/400, IESE Business School. [Downloadable!]
  6. Frank Figge & Tobias Hahn, 2004. "Environmental Shareholder Value Matrix. Konzeption, Anwendung und Berechnung," Others 0408009, EconWPA. [Downloadable!]
  7. Fernández , Pablo, 2002. "The value of tax shields is not equal to the present value of tax shields," IESE Research Papers D/459, IESE Business School. [Downloadable!]
    Other versions:
  8. Fernandez, Pablo, 2005. "Financial literature about discounted cash flow valuation," IESE Research Papers D/606, IESE Business School. [Downloadable!]
  9. Jennergren, L. Peter & Skogsvik, Kenth, 2008. "The Abnormal Earnings Growth Model, Two Exogenous Interest Rates, and Company Taxes," Working Paper Series in Business Administration 2008:9, Stockholm School of Economics, revised 25 Feb 2009. [Downloadable!]
  10. Fernandez, Pablo, 2006. "The correct value of tax shields: An analysis of 23 theories," IESE Research Papers D/628, IESE Business School. [Downloadable!]
  11. André Farber & Roland Gillet & Ariane Szafarz, 2007. "A General Formula for the WACC: A Reply," Working Papers CEB 07-004.RS, Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB). [Downloadable!]
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  12. Fernandez, Pablo, 2003. "Levered and unlevered Beta," IESE Research Papers D/488, IESE Business School. [Downloadable!]
  13. Fernandez, Pablo, 2003. "Equivalence of ten different methods for valuing companies by cash flow discounting," IESE Research Papers D/524, IESE Business School. [Downloadable!]
  14. Fernandez, Pablo, 2005. "Reply to "Comment on the value of tax shields is NOT equal to the present value of tax shields"," IESE Research Papers D/579, IESE Business School. [Downloadable!]
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  15. Fernandez, Pablo, 2004. "Reply to "The value of tax shields is equal to the present value of tax shields"," IESE Research Papers D/576, IESE Business School. [Downloadable!]
  16. Fernandez, Pablo, 2004. "Equivalence of ten different discounted cash flow valuation methods," IESE Research Papers D/549, IESE Business School. [Downloadable!]
  17. Cooper, Ian & Nyborg, Kjell G, 2008. "Tax-Adjusted Discount Rates with Investor Taxes and Risky Debt," CEPR Discussion Papers 6646, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
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