VALUATION, TAX SHIELDS AND THE COST-OF-CAPITAL WITH PERSONAL TAXES: A FRAMEWORK FOR INCORPORATING TAXES

Wolfgang Schultze ()
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Wolfgang Schultze: University of Augsburg, Universitaetsstr. 16, D-86135 Augsburg, Germany

International Journal of Theoretical and Applied Finance (IJTAF), 2004, vol. 07, issue 06, 769-804

Abstract: This paper presents a general approach to deriving valuation models and the relevant cost of capital formulas independent of a particular tax environment. The value of a levered firm depends to a large extent upon the amount and value of the tax shields. The latter in turn differs from country to country and even from firm to firm, depending on its particular situation. It is subject to change with every change in the tax system of the country where the firm is located. Therefore, in an international environment a general approach is needed, which can be altered for any given situation. At the same time personal taxes play an increasing role in the valuation of companies. Therefore, their consideration is integrated into the models derived. Finally, the resulting generalized versions of the Modigliani/Miller- and Miles–Ezzell-Formulas for adjusting the cost of capital to changes in leverage are applied to the situation of a corporation located in Germany after the Tax Reform Act of 2000.

Keywords: Capital structure; cost-of-capital; tax shield; valuation (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (4)

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DOI: 10.1142/S0219024904002621

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