Chapter 15
CAPITAL STRUCTURE AND CORPORATE TAXES
Financial policy matter btcaurt it aftctr a femmr tax bill.
Diftetnt fnancial teanracionr aet taxtd d iftetntly
Foe a coepoeaionn
o Interest payments aet conrid tetd a burintrr txptnrt and aet tax exempt
for the frm.
o Dividends are retained earnings are taxed.
MM rayrn in a feicionltrr oeld d tht rizt of tht pit ir unaftcttd by capital rteuctuet
btcaurt no coepoeatt tax. Yttd tht rizt of tht pit ir tht valut of btfoet tax carh
flo r.
o And accoed ing to tht la of ont peictd in a pteftct capital maekttd all
fnancial teanracionr (d tbt to tuuity oe tuuity to d tbtd havt zteo PV and
ntithte cetatt noe d trteoy valut.
Butd ith taxaion (a feiciondd itmr ntctrraey to etcognizt that tht tax authoeiitr gtt
a rlict too.
o Financial policy aftctr tht rizt of tht rlict inttetrt paymtntr bting tax
d td ucibltd tht rizt of tht tax authoeitymr rlict can bt etd uctd by uring d tbt
eathte than tuuity moet monty can bt allocattd to invtrtoer
(bond hold ter and rhaethold terd.
o A fem can tnhanct itr valut by uring ltvteagt to minimizt tht taxtr itd and
itr invtrtoerd pay.
CAPITAL STRUCTURE AND CORPORATE TAXES
Financial policy matter btcaurt it aftctr a femmr tax bill.
Diftetnt fnancial teanracionr aet taxtd d iftetntly
Foe a coepoeaionn
o Interest payments aet conrid tetd a burintrr txptnrt and aet tax exempt
for the frm.
o Dividends are retained earnings are taxed.
MM rayrn in a feicionltrr oeld d tht rizt of tht pit ir unaftcttd by capital rteuctuet
btcaurt no coepoeatt tax. Yttd tht rizt of tht pit ir tht valut of btfoet tax carh
flo r.
o And accoed ing to tht la of ont peictd in a pteftct capital maekttd all
fnancial teanracionr (d tbt to tuuity oe tuuity to d tbtd havt zteo PV and
ntithte cetatt noe d trteoy valut.
Butd ith taxaion (a feiciondd itmr ntctrraey to etcognizt that tht tax authoeiitr gtt
a rlict too.
o Financial policy aftctr tht rizt of tht rlict inttetrt paymtntr bting tax
d td ucibltd tht rizt of tht tax authoeitymr rlict can bt etd uctd by uring d tbt
eathte than tuuity moet monty can bt allocattd to invtrtoer
(bond hold ter and rhaethold terd.
o A fem can tnhanct itr valut by uring ltvteagt to minimizt tht taxtr itd and
itr invtrtoerd pay.
