THE COST OF CAPITAL UNDER CONDITIONS OF PERSONAL TAXES AND INFLATION

A firm's weighted average cost of capital with personal taxation and inflation is derived. In different scenarios of tax regimes and inflation, it is shown that the cost of capital reduces to various expressions which are consistent with the existing valuation models. It is shown that personal...

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Bibliographic Details
Published in:Journal of business finance & accounting 1995-10, Vol.22 (7), p.1049-1062
Main Authors: Rashid, M., Amoako-Aou, Ben
Format: Article
Language:English
Subjects:
Capital costs
Inflation
Mathematical models
Studies
Tax rates
Taxes
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Summary:A firm's weighted average cost of capital with personal taxation and inflation is derived. In different scenarios of tax regimes and inflation, it is shown that the cost of capital reduces to various expressions which are consistent with the existing valuation models. It is shown that personal tax leads to a higher cost of capital, and inflation raises the nominal cost of capital but the increase is less than 100%. In addition, the relationship between leveraged beta and financial leverage of Hamada (1972) is extended to include personal taxes and inflation.
ISSN:0306-686X
1468-5957
DOI:10.1111/j.1468-5957.1995.tb00893.x