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

Abstract

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

Dempsey, Michael J., 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, Available at SSRN: https://ssrn.com/abstract=374920

Michael J. Dempsey (Contact Author)

Ton Duc Thang University (TDTU) ( email )

District 7
Ho Chi Minh City, 3001
Vietnam

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