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Valuation and Cost of Capital Formulae with Corporate and Personal Taxes: A Synthesis Using the Dempsey Discounted Dividends Model

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  • Mike Dempsey

Abstract

This paper advances expressions for the firm's valuation and cost of capital as a function of leverage. The framework is arrived at by introducing leverage in Dempsey's (1996 and 1998) cost of capital framework and is applicable in the context of both classical and imputation tax systems. The framework reveals that both the historical stability of corporate leverage and the firm's choice of financing structure as revealed by the Pecking Order hypothesis are consistent with a tax‐based explanation.

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  • Mike Dempsey, 2001. "Valuation and Cost of Capital Formulae with Corporate and Personal Taxes: A Synthesis Using the Dempsey Discounted Dividends Model," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 28(3‐4), pages 357-378, April.
    • Handle: RePEc:bla:jbfnac:v:28:y:2001:i:3-4:p:357-378
    DOI: 10.1111/1468-5957.00377
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    Cited by:

    1. Dempsey, Mike, 2001. "Investor tax rationality and the relationship between dividend yields and equity returns: An explanatory note," Journal of Banking & Finance, Elsevier, vol. 25(9), pages 1681-1686, September.
    2. Mike Dempsey & Graham Partington, 2008. "Cost of capital equations under the Australian imputation tax system," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 48(3), pages 439-460, September.
    3. Michael Dempsey, 2019. "Discounting methods and personal taxes," European Financial Management, European Financial Management Association, vol. 25(2), pages 310-324, March.

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