Marginal versus Average Beta of Equity under Corporate Taxation
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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