Consistent Valuation and Cost of Capital Expressions with Corporate and Personal TAxes

Taggart, Robert A.

doi:10.3386/w3074

Cited by 84 publications

(91 citation statements)

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“…This is the expression given in Sick (1990) for risky debt and in Taggart (1991) for riskless debt. If the debt is riskless and there are also no investor taxes, then R D = R F and T * = T C , giving:…”

Section: The Relationship Between Leveraged and Unleveraged Ratesmentioning

confidence: 99%

“…However, there is still no standard approach with respect to calculating tax-adjusted discount rates in the presence of risky debt. Taggart (1991) extends the Miles-Ezzell (1980) formula for tax-adjusted discount rates by including the effect of personal taxes, but assumes that corporate debt is riskless. In practice, the cost of corporate debt includes a default spread.…”

Section: Introductionmentioning

confidence: 99%

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Tax-Adjusted Discount Rates With Investor Taxes and Risky Debt

Cooper

Nyborg

2007

SSRN Journal

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This paper derives tax-adjusted discount rate formulas with Miles-Ezzell leverage policy, investor taxes, and risky debt in the context of a standard tax system. This expands on other formulas that are commonly used and that, for example, assume riskless debt or make different tax assumptions. The paper shows that the errors from using these other formulas are material at reasonable parameter values. Expressions are also given for the asset beta and implementation using the CAPM is discussed. JEL codes: G31, G32

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Section: The Relationship Between Leveraged and Unleveraged Ratesmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Tax-Adjusted Discount Rates With Investor Taxes and Risky Debt

Cooper

Nyborg

2007

SSRN Journal

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“…In an in¯nite time horizon the assumption might be a reliable estimation, but in an explicit forecast period, the capital structure can no longer be constant (Taggart 1991), making the capital structure stability a too simplistic assumptions in many circumstances (e.g. in the case of leverage buy-out operations).…”

Section: Comparing Asset and Equity Cash Flow Method: The Capital Strmentioning

confidence: 99%

Leverage, Cost of Capital and Bank Valuation

Beltrame

Caselli

Previtali

2018

J. Fin. Mngt. Mar. Inst.

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In this paper, we present a model that demonstrates the e®ect of debt on cost of capital and value in the case of banking¯rms. Using a static partial equilibrium setting, both in a steady state and steady growth scenario, we derive a bank-speci¯c valuation metric which separately attributes value to assets and debt cash°ows in the form of a liquidity premium and taxshield. We run our model on a sample of the largest 26 European banks from 2003 to 2016 nding that the value contribution of debt bene¯ts to enterprise value is large and persistent. Further from our model, we derived an implied cost of capital (ICC) measure¯nding consistent results with capital asset pricing model (CAPM). The theoretical framework we present is helpful to address bank debt bene¯ts valuation and to reconcile equity and asset side approaches.

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“…4 LV LT −1 is value of the debt at debt T − 1 and Y D LV LT −1 is the interest payment at date T . 5 We assume that if δY D > 0, then there are taxable earnings of at least this amount. …”

Section: Partial Defaultmentioning

confidence: 99%

Tax-Adjusted Discount Rates: A General Formula under Constant Leverage Ratios

Molnár

Nyborg

2011

SSRN Journal

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Tax-Adjusted Discount Rates: A General Formula under Constant Leverage Ratios Cooper and Nyborg (2008) derive a tax-adjusted discount rate formula under a constant proportion leverage policy, investor taxes and risky debt. However, their analysis assumes zero recovery in default. We extend their framework to allow for positive recovery rates.We also allow for differences in bankruptcy codes with respect to the order of priority of interest payments versus repayment of principal in default, which may have tax consequences. The general formula we derive differs from that of Cooper and Nyborg when recovery rates in default are anticipated to be positive. However, under continuous rebalancing, the formula collapses to that of Cooper and Nyborg. We provide an explanation for why the effect of the anticipated recovery rate is not directly visible in the general continuous rebalancing formula, even though this formula is derived under the assumption of partial default. The errors from using the continuous approximation formula are sensitive to the anticipated recovery in default, yet small. The "cost of debt" in the tax adjusted discount rate formula is the debt's yield rather than its expected rate of return.

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Consistent Valuation and Cost of Capital Expressions with Corporate and Personal TAxes

Cited by 84 publications

References 1 publication

Tax-Adjusted Discount Rates With Investor Taxes and Risky Debt

Tax-Adjusted Discount Rates With Investor Taxes and Risky Debt

Leverage, Cost of Capital and Bank Valuation

Tax-Adjusted Discount Rates: A General Formula under Constant Leverage Ratios

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