Valuation in the Public and Private Sectors: Tax, Risk, Debt Capacity, and the Cost of Capital

46 Pages Posted: 29 Oct 2018

See all articles by Richard A. Brealey

Richard A. Brealey

London Business School

Ian A. Cooper

London Business School

Michel A. Habib

University of Zurich; Swiss Finance Institute

Date Written: October 2018

Abstract

The public and private sector costs of capital differ in the presence of taxes, because taxes are a cost to the private but not the public sector. We use a quasi-arbitrage approach to show how to include taxes in a comparison of capital costs. We find that taxes induce distortions that generate a systematic private sector preference for assets with rapid tax depreciation, high debt capacity, and low risk. We examine the implications of that preference for privatization, government outsourcing, and regulation. Our approach facilitates the analysis of transactions such as pure risk transfers, otherwise difficult using standard discounting methods.

Keywords: cost of capital, debt capacity, private sector, Public sector, risk, tax, Valuation

JEL Classification: G18

Suggested Citation

Brealey, Richard A. and Cooper, Ian Anthony and Habib, Michel A., Valuation in the Public and Private Sectors: Tax, Risk, Debt Capacity, and the Cost of Capital (October 2018). CEPR Discussion Paper No. DP13277, Available at SSRN: https://ssrn.com/abstract=3274618

Richard A. Brealey (Contact Author)

London Business School ( email )

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Ian Anthony Cooper

London Business School ( email )

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London, London NW1 4SA
United Kingdom
+44 171 262 5050 (Phone)

Michel A. Habib

University of Zurich ( email )

Plattenstrasse 14
Zurich, 8032
Switzerland
41-44-634-2507 (Phone)
41-44-634-4903 (Fax)

HOME PAGE: http://www.isb.uzh.ch/institut/profs/mhabib.htm

Swiss Finance Institute ( email )

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

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