Download PDF by Ramesh K. S. Rao: A Theory of the Firm's Cost of Capital: How Debt Affects the

By Ramesh K. S. Rao

ISBN-10: 9812569499

ISBN-13: 9789812569493

The price of capital notion has myriad purposes in enterprise decision-making. the traditional method for deriving rate of capital estimates is predicated at the seminal Modigliani-Miller analyses. This e-book generalizes this framework to incorporate non-debt tax shields (e.g., depreciation), interactions among the borrowing fee and tax shields, and default concerns. It develops numerous new effects and indicates how greater fee of capital and marginal tax price estimates might be generated. The book's unified fee of capital thought is mentioned with accomplished numerical examples and graphical illustrations. This e-book might be of curiosity to company managers, teachers, funding bankers, governmental corporations, and personal businesses that generate fee of capital estimates for public intake.

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Additional resources for A Theory of the Firm's Cost of Capital: How Debt Affects the Firm's Risk, Value, Tax Rate, and The...

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Note that the standard definition of the after-tax cost of debt, r(1 − T ) (borrowing rate multiplied by one minus the tax rate), yields a generally biased proxy for kD . 2. 47 2nd Reading 11:15 spi-b456 A Theory of the Firm’s Cost of Capital 9in x 6in ch07 A Theory of the Firm’s Cost of Capital (Continued ) December 12, 2006 48 Numerical illustration: parameters assumed. Table 8. 08 11:15 Initial investment, A Corporate tax rate, T Expected return on a zero-beta asset, r December 12, 2006 (Continued) Numerical Illustration Table 8.

1985), Green and Talmor (1985), and Ehrhardt and Daves (2002). In Ruback (2002), the risk of the interest tax shields matches that of the firm’s assets. Fernandez (2004) assumes that the risk of the non-debt tax shields is the same as that of the unlevered firm and that the levered firm’s tax shields have the same risk as the firm’s equity. December 12, 2006 11:15 spi-b456 A Theory of the Firm’s Cost of Capital 9in x 6in ch05 A Theory of the Firm’s Cost of Capital 36 the return betas for these claims depend on their tax treatment.

For example, in case 11 the tax rate appears in the par yield expression: In state “p” debt principal is only partially repaid, although the firm pays taxes. Thus, for a higher tax rate, less after-tax funds are available to repay creditors. 21 Our interest in this research is not on the tax shields’ risks per se. Rather, the ability to model their risks analytically allows us to better understand how borrowing affects the firm’s total risk (risk of debt plus equity). This knowledge is critical for correctly estimating the WACC and MTR.

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A Theory of the Firm's Cost of Capital: How Debt Affects the Firm's Risk, Value, Tax Rate, and The... by Ramesh K. S. Rao


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