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

E. Stevens, R. Rao, 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, World Scientific, 2007

3 Pages Posted: 4 Oct 2009 Last revised: 9 Oct 2009

See all articles by Ramesh K. S. Rao

Ramesh K. S. Rao

University of Texas at Austin - Department of Finance

Eric C. Stevens

American Express TRS Co., Inc.

Date Written: March 12, 2007

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.

This book will be of interest to corporate managers, academics, investment bankers, governmental agencies, and private companies that generate cost of capital estimates for public consumption.

Keywords: Cost of Capital, Marginal Tax Rate, WACC (Weight Average Cost of Capital), Debt Capacity, Leverage, Borrowing, Tax Shields

Suggested Citation

Rao, Ramesh K. S. and Stevens, Eric C., 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 (March 12, 2007). E. Stevens, R. Rao, 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, World Scientific, 2007. Available at SSRN: https://ssrn.com/abstract=1477305

Ramesh K. S. Rao (Contact Author)

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-475-8756 (Phone)
512-471-5073 (Fax)

Eric C. Stevens

American Express TRS Co., Inc. ( email )

Phoenix, AZ 85021
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
399
Abstract Views
1,517
rank
72,050
PlumX Metrics