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Department of Economics, University of Oslo Memorandum

No 12/2009:
Marginal versus Average Beta of Equity under Corporate Taxation

Diderik Lund ()

Abstract: Even for fully equity-financed firms there may be substantial effects of taxation on the after-tax cost of capital. Among the few studies of these effects, even fewer identify all effects correctly. When marginal investment is taxed together with inframarginal, marginal beta differs from average if there are investmentrelated deductions like depreciation. To calculate asset betas, one should not only "unlever" observed equity betas, but "untax" and "unaverage" them. Risky tax claims are valued as call options, with closed-form solutions for the exercise probability. Results have practical relevance for multinationals operating under different tax systems.

Keywords: Cost of capital; WACC; loss offset; tax shields; options; (follow links to similar papers)

JEL-Codes: F23; G31; H25; (follow links to similar papers)

56 pages, June 9, 2009

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This paper is published as:
Lund, Diderik, (2014), 'How taxes on firms reduce the risk of after-tax cash flows', FinanzArchiv/Public Finance Analysis, Vol. 70, No. 4, pages 567-598



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