Quotation Frühwirth, Manfred, Schwaiger, Markus. 2006. DCF Business Valuation in Tax Regimes with Imputed Interest on the Stock of Equity. Refereed Working Paper Series of the Weatherhead Center for International Affairs, Harvard University.


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Abstract

In the last two decades several European countries implemented tax systems that allow for the deduction of imputed equity interest from a company’s tax base. This paper integrates the tax benefits resulting from imputed interest on the stock of equity into business valuation. Three alternative discounted cash flow valuation methods are used to this end: the equity method, the Adjusted Present Value (APV) method, and the entity method. Intertemporal differences in risk require the use of various risk-adjusted discount rates in the equity method as well as the APV method. Using the equity method we show that the well-known, market-to-book ratio of the constant growth dividend discount model also holds in our model. When applying the APV method with imputed equity interest, an adjustment is necessary for each business, also for an unlevered company, to account for the tax shield resulting from equity financing. A closed-form solution is presented for the value of this tax benefit. We furthermore derive the weighted average cost of capital (WACC) under imputed interest on the stock of equity and the adjustment of the cost of equity that is necessary to derive the WACC as a weighted average of cost of equity and debt.

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Publication's profile

Status of publication Published
Affiliation WU
Type of publication Working/discussion paper, preprint
Language English
Title DCF Business Valuation in Tax Regimes with Imputed Interest on the Stock of Equity
Title of whole publication Refereed Working Paper Series of the Weatherhead Center for International Affairs, Harvard University
Year 2006
URL http://www.wcfia.harvard.edu/publications/wcfia_working_papers

Associations

People
Frühwirth, Manfred (Details)
Schwaiger, Markus (Former researcher)
Organization
Business Administration Financing and Finance Markets (Former organization)
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