Valuation, leverage and the cost of capital in the case of depreciable assets

Diderik Lund

No 03-2003, Working Papers from Copenhagen Business School, Department of Economics

Abstract: Levy and Arditti (1973) introduced depreciable assets into the Modigliani and Miller (1958) model, and analyzed the implications for the cost of capital. Assuming that the firm reinvests indefinitely to maintain a constant expected cash flow, they found that depreciation increases the cost of capital before and after tax. Most of their assumptions are maintained. However, commitment to perpetual reinvestment is in most cases not a reasonable assumption. Without it, depreciation decreases the cost of capital before and after tax. The effect of depreciation is less in absolute value than in Levy and Arditti, but not insignificant.

Keywords: Cost of capital; depreciation; corporate taxes (search for similar items in EconPapers)
JEL-codes: G31 H25 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2006-08-22
New Economics Papers: this item is included in nep-acc, nep-cfn, nep-fin, nep-fmk and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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