Wealth Maximization and the Cost of Capital

14 Pages Posted: 3 Jan 2002 Last revised: 12 Sep 2022

See all articles by Alan J. Auerbach

Alan J. Auerbach

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Date Written: April 1980

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.

Suggested Citation

Auerbach, Alan Jeffrey, Wealth Maximization and the Cost of Capital (April 1980). NBER Working Paper No. w0254, Available at SSRN: https://ssrn.com/abstract=260445

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