Consistent Valuation and Cost of Capital Expressions with Corporate and Personal TAxes

This paper examines three valuation methods, each of which should lead to the same value for a given asset. These are the Adjusted Present Value, Adjusted Discount Rate and Flows to Equity methods. To achieve identical valuations, however, the different methods must be implemented with cost of capital expressions that embody a consistent set of assumptions about (1) the tax regime and (2) the time pattern and riskiness of debt tax shields. Valuation and cost of capital expressions that have been proposed in the literature are grouped and contrasted according to these assumptions. It is also shown that the familiar weighted average cost of capital can be consistent with any such set of assumptions, as long as the correct expression is used to estimate the relationship between the levered and unlevered cost of equity.