Wealth Maximization and the Cost of Capital

Alan Auerbach

No 254, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In this paper we explore the issue of wealth maximization and the implied behavior of the firm, paying particular attention to the results discussed above and how they are affected by the existence of capital income taxes. Our results indicate that a tax structure similar to that in existence in the United States influences the cost of capital in a very different way than has been assumed previously and that the relative advantages of debt over equity as a method of finance, and capital gains over dividends as a vehicle for personal realization of corporate profits, may have been greatly overstated. These findings may help to explain certain aspects of corporate financial behavior that have seemed puzzling.

Date: 1980-04
Note: PE
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Published as Auerbach, Alan J. "Wealth Maximization and the Cost of Capital." The Quarterly Journal of Economics, Vol. XCIII, No. 3, (August 1979), pp. 433-446.

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