Journal of Banking & Finance Vol. 27 No. 6 2003
Risk, returns, and values in the presence of differential taxation
Abstract
We show that there exist separate security market lines (SMLs) for debt and equity securities in an equilibrium with differential taxation of debt and equity. We characterize the conditions under which these SMLs have the same price of risk (with different intercepts) and the conditions under which the tax effect of leverage is linear in debt value as in the adjusted present value method. We explore the implications of our results for cost of capital calculations: How to calculate the cost of capital for debt and equity and how to unlever betas correctly accounting for differential taxation.
- DOI
- 10.1016/s0378-4266(02)00249-2
- Volume
- 27
- Issue
- 6
- Pages
- 1123-1138
- Language
- en
- Sources
- openalex crossref bibtex:phds-export.bib