Consistent valuation and Cost of Capital Expressions With Corporate and Personal Taxes

Robert A. Taggart and Jr.

Financial Management, 1991, vol. 20, issue 3

Abstract: The conditions under which the adjusted present value, adjusted discount rate and flows to equity valuation methods all lead to identical asset values in the presence of corporate and personal taxes are examined. Three distinct sets of valuation and cost of capital expressions are derived corresponding to different assumptions about the risk and time pattern of an asset's interest tax shields. To achieve identical valuations, the analyst must remain within one of these sets of expressions. While it is possible to achieve consistent valuation in most cases, however, it is often cumbersome to implement one or more of the valuation methods. Suggestions are offered for choosing the preferred valuation method in different circumstances.

Date: 1991
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