Supply and demand functions for loanable funds are postulated for a no‐inflation economy and equilibrium levels of saving, investment, and the interest rate are specified. Certainty and nondepreciating assets are assumed. An exogenous inflation rate is imposed upon this same economy and new equilibrium values for these same variables are established. The analysis is performed twice. The first time, a Modigliani‐Miller [17] tax structure is assumed while the second analysis assumes a Miller‐Scholes [15] tax structure. In both cases, inflation causes the nominal rate to increase by more than the inflation rate. The analysis is repeated assuming that investments live for one period and are then written off against taxable income at historical cost. In both tax structures, the level of saving and investment is a decreasing function of the inflation rate.

James A. Miles, John R. Ezzell, The Weighted Average Cost of Capital, Perfect Capital Markets, and Project Life: A Clarification, The Journal of Financial and Quantitative Analysis, Vol. 15, No. 3 (Sep., 1980), pp. 719-730

Standard financial theory (in the absence of agency costs and personal taxes) implies that each dollar of debt contributes to the value of the firm in proportion to the firm's tax rate. To derive this result, incremental debt is assumed permanent. This paper shows that when the firm acts to maintain a constant market value leverage ratio, the marginal value of debt financing is much lower than the corporate tax rate. Since Hamada's [2] unlevering procedure for observed equity betas was derived under the assumption of permanent debt, we derive an unlevering procedure consistent with the assumption of a constant leverage ratio.

This paper presents estimates of the effect of a voluntary spin‐off announcement on shareholder wealth. The results show that spin‐off announcements have a positive influence on stock prices and that the relative increase in share price is greater for large spin‐offs than for small ones.

We investigate the value created through spinoffs over the 1965–1988 period by measuring the stock returns of spinoffs, their parent firms, and parent-spinoff combinations for periods of up to three years following the spinoffs. We find significantly positive abnormal returns for spinoffs, their parents, and the spinoff-parent combinations. Both the spinoffs and parents experience an unusually high incidence of takeovers and the abnormal performance is limited to firms involved in takeover activity. These findings suggest that spinoffs provide a low-cost method of transferring control of corporate assets to bidders who will create greater value.