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A Theory of the Firm's Cost of Capital:How Debt Affects the Firm's Risk, Value, Tax Rate and the Government's Tax Claim

Author

Listed:
  • Ramesh K S Rao

    (University of Texas at Austin, USA)

  • Eric C Stevens

    (USA)

Abstract

The cost of capital concept has myriad applications in business decision-making. The standard methodology for deriving cost of capital estimates is based on the seminal Modigliani-Miller analyses. This book generalizes this framework to include non-debt tax shields (e.g., depreciation), interactions between the borrowing rate and tax shields, and default considerations. It develops several new results and shows how better cost of capital and marginal tax rate estimates can be generated. The book's unified cost of capital theory is discussed with comprehensive numerical examples and graphical illustrations.

Individual chapters are listed in the "Chapters" tab

Suggested Citation

  • Ramesh K S Rao & Eric C Stevens, 2007. "A Theory of the Firm's Cost of Capital:How Debt Affects the Firm's Risk, Value, Tax Rate and the Government's Tax Claim," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 6204, January.
    • Handle: RePEc:wsi:wsbook:6204
    as

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    File URL: https://www.worldscientific.com/worldscibooks/10.1142/6204
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    Book Chapters

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    More about this item

    Keywords

    Cost of Capital; Marginal Tax Rate; WACC (Weight Average Cost of Capital); Debt Capacity; Leverage; Borrowing; Tax Shields;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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