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Valuation, Tax Shields And The Cost-Of-Capital With Personal Taxes: A Framework For Incorporating Taxes

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  • WOLFGANG SCHULTZE

    (University of Augsburg, Universitaetsstr. 16, D-86135 Augsburg, Germany)

Abstract

This paper presents a general approach to deriving valuation models and the relevant cost of capital formulas independent of a particular tax environment. The value of a levered firm depends to a large extent upon the amount and value of the tax shields. The latter in turn differs from country to country and even from firm to firm, depending on its particular situation. It is subject to change with every change in the tax system of the country where the firm is located. Therefore, in an international environment a general approach is needed, which can be altered for any given situation. At the same time personal taxes play an increasing role in the valuation of companies. Therefore, their consideration is integrated into the models derived. Finally, the resulting generalized versions of the Modigliani/Miller- and Miles–Ezzell-Formulas for adjusting the cost of capital to changes in leverage are applied to the situation of a corporation located in Germany after the Tax Reform Act of 2000.

Suggested Citation

  • Wolfgang Schultze, 2004. "Valuation, Tax Shields And The Cost-Of-Capital With Personal Taxes: A Framework For Incorporating Taxes," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 7(06), pages 769-804.
    • Handle: RePEc:wsi:ijtafx:v:07:y:2004:i:06:n:s0219024904002621
    DOI: 10.1142/S0219024904002621
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    Citations

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    Cited by:

    1. Bachmann, Carmen & Schultze, Wolfgang, 2011. "Bewertung von Kapitalgesellschaften: Der Steuervorteil der Fremdfinanzierung unter schweizerischem Steuerrecht," Die Unternehmung - Swiss Journal of Business Research and Practice, Nomos Verlagsgesellschaft mbH & Co. KG, vol. 65(1), pages 6-31.
    2. Nguyen Kim-Duc & Pham Khanh Nam, 2024. "Consistent valuation: extensions from bankruptcy costs and tax integration with time-varying debt," Review of Quantitative Finance and Accounting, Springer, vol. 62(2), pages 719-754, February.
    3. Kim-Duc, Nguyen & Nam, Pham Khanh, 2023. "Inflation-related tax distortions in business valuation models: A clarification," The North American Journal of Economics and Finance, Elsevier, vol. 66(C).
    4. Wolfgang Schultze & Martin Meyer, 2005. "Die Kapitalflussrechnung in der Unternehmensbewertung: Bewertungskalkül und Gestaltungshinweise," Metrika: International Journal for Theoretical and Applied Statistics, Springer, vol. 16(3), pages 289-324, September.

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