Adjusting Discount Rates in the Presence of a Simple Tax System (Die Arbitragefreie Adjustierung von Diskontierungssätzen bei einfacher Gewinnsteuer)

Schmalenbachs Zeitschrift für betriebswirtschaftliche Forschung, Vol. 58, No. 6, pp. 771-806, September 2006

41 Pages Posted: 17 May 2004 Last revised: 7 Aug 2009

See all articles by Marc Steffen Rapp

Marc Steffen Rapp

University of Marburg - School of Business & Economics; University of Marburg - Marburg Centre for Institutional Economics (MACIE)

Date Written: December 20, 2006

Abstract

For investment projects with finite horizon and deterministic leverage the idea of weighted average cost of capital (wacc) was introduced 1980 by Miles/Ezzell under restrictive assumptions. In this paper we deal with the wacc idea in the context of arbitrage-free capital markets by relaxing the assumptions of Miles/Ezzell. In particular we allow for general cash flow structures and risky debt. Following Miles/Ezzell we restrict ourselves to the situation of a linear tax on corporate level and debt financing according to a deterministic leverage. Under these conditions we derive an arbitrage-free relation that links the discount rates of a particular cash flow of a fully equity financed project with discount rates of the cash flow of a debt-financed project. Furthermore we show that in general this relation may not be employed to expected returns of the project.

Note: Downloadable document is in German.

Keywords: capital budgeting, wacc, risk neutral valuation

JEL Classification: G12, G31, G32

Suggested Citation

Rapp, Marc Steffen, Adjusting Discount Rates in the Presence of a Simple Tax System (Die Arbitragefreie Adjustierung von Diskontierungssätzen bei einfacher Gewinnsteuer) (December 20, 2006). Schmalenbachs Zeitschrift für betriebswirtschaftliche Forschung, Vol. 58, No. 6, pp. 771-806, September 2006. Available at SSRN: https://ssrn.com/abstract=520923

Marc Steffen Rapp (Contact Author)

University of Marburg - School of Business & Economics ( email )

Am Plan 2
Marburg, D-35037
Germany

University of Marburg - Marburg Centre for Institutional Economics (MACIE) ( email )

Am Plan
Marburg, 35032
Germany

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