Valuation and Cost of Capital Formulae with Corporate and Personal Taxes: A Synthesis Using the Dempsey Discounted Dividends Model
Journal of Business Finance and Accounting, Vol. 28, Nos. 3 & 4, pp. 357-378, 2001
Posted: 31 Jan 2003
The paper advances expressions for the firm's valuation and cost of capital as a function of leverage. The framework is arrived at by introducing leverage in Dempsey's (1996, 1998) cost of capital framework and is applicable in the context of both classical and imputation tax systems. The framework reveals that both the historical stability of corporate leverage and the firm's choice of financing structure as revealed by the Pecking Order hypothesis are consistent with a tax-based explanation.
Keywords: cost of capital, capital structure, leverage, personal taxes, tax imputation, pecking order hypothesis
JEL Classification: G31, G32
Suggested Citation: Suggested Citation