Cost of Capital when Dividends are Deductible

Ignacio Velez-Pareja () and Julian Benavides Franco ()
Additional contact information
Julian Benavides Franco: Universidad Icesi

Brazilian Review of Finance, 2011, vol. 9, issue 3, 309-334

Abstract: Tax savings and the discount rate we use to calculate their value are involved in the calculation of cost of capital. Based on previous findings, we derive a general approach to cash flow valuation that take into account any kind of tax shields related to the financing decision of a firm and any date when they are earned. They can be used to introduce any type of externality that creates value through tax savings not captured by neither the cost of debt nor the cost of equity. This paper develops the formulations for the cost of capital when dividends, interest on equity or monetary correction of equity are deductible as it happens in Brazil. It shows that when properly done most known valuation methods are consistent and give identical results. Also, the paper argues that when dividends are tax deductible, optimal leverage is lower and equity value is higher.

Keywords: Corporate Finance; WACC; interest on equity; tax savings; tax shields; cost of equity; discount rate for tax savings (search for similar items in EconPapers)
JEL-codes: D61 G31 H43 (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://bibliotecadigital.fgv.br/ojs/index.php/rbfin/article/download/3037/2271 (application/pdf)
http://bibliotecadigital.fgv.br/ojs/index.php/rbfin/article/view/3037 (text/html)

Related works:
Working Paper: Cost of capital when dividens are deductible (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:brf:journl:v:9:y:2011:i:3:p:309-334

Access Statistics for this article

Brazilian Review of Finance is currently edited by Marcio Laurini

More articles in Brazilian Review of Finance from Brazilian Society of Finance
Bibliographic data for series maintained by Marcio Laurini ().