The Weighted Cost of Capital and Adjusted Present Value in an Imperfect Market with Taxes

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Debt benefit related to corporate income tax

You already have an idea about the correct working technique about financing. When it comes to an understanding about the speculations related to M&M perfect-market, one of the highly considered violations that you will find in this context is corporate income taxes. Going through this chapter, you will get an insight of taxes and certain capital structure policies that bring a decline in these. For various leverage structures and calculations associated with it, there are few explicit tax-value formulations.

Amongst all those formulations, 2 popular ones are:

  1. Tax adjusted WACC (weighted average cost of capital)
  2. APV (adjusted present value)

Formulas like these are of importance in finance, and it takes separate study time to understand about these and how these are used. A close study of these will lead you to the knowledge of the serelated to corporate income taxes. This is mainly to help you realise that WACC and AVP are not for personal income taxes of investors. An excellent example of it can be considered as shareholders whom you can think to be a type of fund (tax exempted pension fund).

 

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