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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

This paper examines three valuation methods, each of which should lead to the same value for a given asset. These are the Adjusted Present Value, Adjusted Discount Rate and Flows to Equity methods. To achieve identical valuations, however, the different methods must be implemented with cost of capital expressions that embody a consistent set of assumptions about (1) the tax regime and (2) the time pattern and riskiness of debt tax shields. Valuation and cost of capital expressions that have been proposed in the literature are grouped and contrasted according to these assumptions. It is also shown that the familiar weighted average cost of capital can be consistent with any such set of assumptions, as long as the correct expression is used to estimate the relationship between the levered and unlevered cost of equity.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3074.

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Date of creation: Aug 1989
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Handle: RePEc:nbr:nberwo:3074

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  1. Myers, Stewart C & Turnbull, Stuart M, 1977. "Capital Budgeting and the Capital Asset Pricing Model: Good News and Bad News," Journal of Finance, American Finance Association, vol. 32(2), pages 321-33, May. [Downloadable!] (restricted)
  2. Hamada, Robert S, 1969. "Portfolio Analysis, Market Equilibrium and Corporation Finance," Journal of Finance, American Finance Association, vol. 24(1), pages 13-31, March. [Downloadable!] (restricted)
  3. Rubinstein, Mark E, 1973. "A Mean-Variance Synthesis of Corporate Financial Theory," Journal of Finance, American Finance Association, vol. 28(1), pages 167-81, March. [Downloadable!] (restricted)
  4. Bey, Roger P & Collins, J Markham, 1988. "The Relationship between Before- and After-Tax Yields on Financial Assets," The Financial Review, Eastern Finance Association, vol. 23(3), pages 313-31, August.
  5. Fama, Eugene F., 1977. "Risk-adjusted discount rates and capital budgeting under uncertainty," Journal of Financial Economics, Elsevier, vol. 5(1), pages 3-24, August. [Downloadable!] (restricted)
  6. Masulis, Ronald W, 1983. " The Impact of Capital Structure Change on Firm Value: Some Estimates," Journal of Finance, American Finance Association, vol. 38(1), pages 107-26, March. [Downloadable!] (restricted)
  7. Black, Fischer & Scholes, Myron, 1974. "The effects of dividend yield and dividend policy on common stock prices and returns," Journal of Financial Economics, Elsevier, vol. 1(1), pages 1-22, May. [Downloadable!] (restricted)
  8. Miles, James A. & Ezzell, John R., 1980. "The Weighted Average Cost of Capital, Perfect Capital Markets, and Project Life: A Clarification," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 15(03), pages 719-730, September. [Downloadable!]
  9. Lewellen, Wilbur G. & Emery, Douglas R., 1986. "Corporate Debt Management and the Value of the Firm," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(04), pages 415-426, December. [Downloadable!]
  10. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May. [Downloadable!] (restricted)
  11. Conine, Thomas E, Jr, 1980. " Corporate Debt and Corporate Taxes: An Extension," Journal of Finance, American Finance Association, vol. 35(4), pages 1033-37, September. [Downloadable!] (restricted)
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