Valuation with or Without Personal Income Taxes?

Schmalenbach Business Review, Vol. 56, pp. 20-45, January 2004

26 Pages Posted: 7 Jun 2004

See all articles by Frank Richter

Frank Richter

Goldman, Sachs & Co. oHG; University of Witten/Herdecke - Institute for Mergers and Acquisitions

Abstract

This paper reviews different schools of thought on the question of if and how personal taxes should be incorporated into the valuation of companies or projects. The paper shows under which conditions the risk-neutral valuation approach yields the same result as the Tax-CAPM. Special cases are analyzed that imply irrelevance of personal taxes. In addition, empirical questions are addressed, such as how to determine the expected market rate of return after personal taxes. For this purpose current market prices are used in combination with cash-flow forecasts of financial analysts. Finally, a view is presented on the precision required to estimate the personal tax rate. If both the investment opportunity and its alternative are similarly tax affected, then relative values should not change too much as a function of the tax rate. However, common sensitivity analyses indicate the opposite.

Keywords: Asset Pricing Theory, Taxes, Valuation

JEL Classification: G32

Suggested Citation

Richter, Frank, Valuation with or Without Personal Income Taxes?. Schmalenbach Business Review, Vol. 56, pp. 20-45, January 2004, Available at SSRN: https://ssrn.com/abstract=555101

Frank Richter (Contact Author)

Goldman, Sachs & Co. oHG ( email )

Messeturm
Friedrich-Ebert-Anlage 49
Frankfurt am Main, 60308
Germany
+49 69 7532 2580 (Phone)
+49 69 7532 2800 (Fax)

University of Witten/Herdecke - Institute for Mergers and Acquisitions ( email )

Alfred-Herrhausen-Strasse 50
58448 Witten
Germany
+49 69 7532 2580 (Phone)

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