A Theory of the Firm's Cost of Capital:How Debt Affects the Firm's Risk, Value, Tax Rate and the Government's Tax Claim

Ramesh K S Rao and Eric C Stevens
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Ramesh K S Rao: University of Texas at Austin, USA
Eric C Stevens: USA

in World Scientific Books from World Scientific Publishing Co. Pte. Ltd.

Abstract: The cost of capital concept has myriad applications in business decision-making. The standard methodology for deriving cost of capital estimates is based on the seminal Modigliani-Miller analyses. This book generalizes this framework to include non-debt tax shields (e.g., depreciation), interactions between the borrowing rate and tax shields, and default considerations. It develops several new results and shows how better cost of capital and marginal tax rate estimates can be generated. The book's unified cost of capital theory is discussed with comprehensive numerical examples and graphical illustrations.

Keywords: Cost of Capital; Marginal Tax Rate; WACC (Weight Average Cost of Capital); Debt Capacity; Leverage; Borrowing; Tax Shields (search for similar items in EconPapers)
JEL-codes: G32 (search for similar items in EconPapers)
Date: 2007
ISBN: 9789812569493
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Chapters in this book:

Ch 1 Introduction , pp 1-4

Ramesh K S Rao and Eric C Stevens

Ch 2 Model Setting , pp 5-18

Ramesh K S Rao and Eric C Stevens

Ch 3 Distributional Assumptions , pp 19-21

Ramesh K S Rao and Eric C Stevens

Ch 4 Model Solution Procedure , pp 23-31

Ramesh K S Rao and Eric C Stevens

Ch 5 Discussion of Results , pp 33-43

Ramesh K S Rao and Eric C Stevens

Ch 6 Extension to s × s States , pp 45-46

Ramesh K S Rao and Eric C Stevens

Ch 7 Numerical Illustration , pp 47-56

Ramesh K S Rao and Eric C Stevens

Ch 8 Conclusion , pp 57-61

Ramesh K S Rao and Eric C Stevens

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