Memorandum // Department of Economics, University of Oslo 2009,12
Even for fully equity-financed firms there may be substantial effects of taxation on the after-tax cost of capital. Among the few studies of these effects, even fewer identify all effects correctly. When marginal investment is taxed together with inframarginal, marginal beta differs from average if there are investment-related deductions like depreciation. To calculate asset betas, one should not only 'unlever observed equity betas, but 'untax' and 'unaverage' them. Risky tax claims are valued as call options, with closed-form solutions for the exercise probability. Results have practical relevance for multinationals operating under different tax systems.
Cost of capital WACC loss offset tax shields options