The traditional literature on the CAPM assumes that investor's tax payments simply vanish from themodel. This assumption is not at all consistent with the actual behavior of the Treasury. The theoryof general equilibrium states that an interest rate rf = 0 will not affect prices if taxes are...

This paper describes a simple way to integrate the debt tax shield into an accounting-based valuation model. The market value of equity is determined by forecasting residual operating income, which is calculated by charging operating income for the operating assets at a required return that...