Cost of Capital Equations Under the Australian Imputation Tax System

22 Pages Posted: 14 Aug 2008

See all articles by Michael J. Dempsey

Michael J. Dempsey

Ton Duc Thang University (TDTU)

Graham Partington

University of Sydney - School of Business - Finance Discipline; Financial Research Network (FIRN)

Date Written: 2007-10-03

Abstract

Since the introduction of the Australian imputation tax system, there have been problems both in the measurement of the market value of franking (imputation tax) credits and in their application to estimating cash flows and the cost of capital. In the present paper, we provide a convenient and robust resolution to the above problems in the context of an internally consistent set of equations for the cost of capital, asset valuation and the capital asset pricing model (CAPM). The equations apply under both classical and imputation tax systems and under differential taxation of dividends, capital gains and interest. The simple form of the CAPM presented here is shown to encompass more complex versions of the CAPM, which attempt to accommodate the effect of personal taxes. The valuation equations require an estimate of the market value of $1 of the firm's dividends, within which is embedded the market value of the imputation tax credits. Separate estimates of the value of imputation tax credits, or Officer's gamma factor, are not required.

Suggested Citation

Dempsey, Michael J. and Partington, Graham, Cost of Capital Equations Under the Australian Imputation Tax System (2007-10-03). Accounting & Finance, Vol. 48, Issue 3, pp. 439-460, September 2008, Available at SSRN: https://ssrn.com/abstract=1224071 or http://dx.doi.org/10.1111/j.1467-629X.2007.00252.x

Michael J. Dempsey (Contact Author)

Ton Duc Thang University (TDTU) ( email )

District 7
Ho Chi Minh City, 3001
Vietnam

Graham Partington

University of Sydney - School of Business - Finance Discipline ( email )

Building H69
Sydney NSW, 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
2
Abstract Views
1,559
PlumX Metrics