Discount Rates and Tax

39 Pages Posted: 6 Sep 2004

See all articles by Ian A. Cooper

Ian A. Cooper

London Business School

Kjell G. Nyborg

University of Zurich - Department of Banking and Finance; Centre for Economic Policy Research (CEPR); Swiss Finance Institute

Date Written: August 2004


Subject Areas: Corporate finance, taxes, cost of capital, capital expenditure, valuation analysis

This note summarises the relationships between values, rates of return and betas that depend on taxes. It extends the standard analysis to include the effect of risky debt. It brings together a variety of results that are often misunderstood or misinterpreted. Both the WACC and APV approaches are presented for a generalised tax system that encompasses both classical and imputation systems. It shows how basic assumptions about the tax treatment of the 'representative' investor, the firm's dividend policy, the firm's leverage policy and the riskiness of the tax savings from interest give rise to particular expression for leveraged and unleveraged betas and discount rates. Results for the Miller-Modigliani and Miles-Ezzell assumptions are summarised in detail and presented in a simple table.

JEL Classification: G31, G32, H25

Suggested Citation

Cooper, Ian Anthony and Nyborg, Kjell G., Discount Rates and Tax (August 2004). Available at SSRN:

Ian Anthony Cooper (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
+44 171 262 5050 (Phone)

Kjell G. Nyborg

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032
+41 (0)44 634 2980 (Phone)

Centre for Economic Policy Research (CEPR)

United Kingdom

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4

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