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Valuation and Cost of Capital Formulae with Corporate and Personal Taxes: A Synthesis Using the Dempsey Discounted Dividends Model
Author(s) -
Dempsey Mike
Publication year - 2001
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/1468-5957.00377
Subject(s) - valuation (finance) , leverage (statistics) , capital structure , economics , dividend , cost of capital , residual income valuation , microeconomics , pecking order , weighted average cost of capital , corporate finance , imputation (statistics) , capital budgeting , econometrics , accounting , finance , capital formation , mathematics , debt , financial capital , incentive , profit (economics) , statistics , evolutionary biology , missing data , biology , project appraisal
This 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 and 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.