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THE TAX‐DEDUCTIBILITY OF INTEREST PAYMENTS AND THE WEIGHTED AVERAGE COST OF CAPITAL — A REPLY

THE TAX‐DEDUCTIBILITY OF INTEREST PAYMENTS AND THE WEIGHTED AVERAGE COST OF CAPITAL — A REPLY (b) To what extent are the solutions produced by the above approaches affected by a time-lag in the payment of corporate taxes? THE ALTERNATIVE v THE TRADITIONAL APPROACH Both the foregoing comments reject the$?tion that one approach is theoretically superior to the other. Levacic and Rebmann-Huber argue that, since the two approaches give identical, unbiased estimates of net present value when there is no time-lag in the payment of tax, both are “equally consistent with the economic rationale of discounting”. Partington argues that my case for the superiority of the alternative approach rests on my particular definition of the present value concept and that the case loses its force with his more general definition, viz. “The present value concept is based on the premise that a project’s cash flows should be converted to a present value equivalent by being discounted at the cost of capital.” To reply to these comments it is convenient again to use a numerical example for simplicity of presentation. L t us assume a Modighani-Miller world (i.e. the absence of bankruptcy costs, personal taxation, etc., since these factors do not affect the basic issue) in which the only effect of debt capital is the http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Business Finance & Accounting Wiley

THE TAX‐DEDUCTIBILITY OF INTEREST PAYMENTS AND THE WEIGHTED AVERAGE COST OF CAPITAL — A REPLY

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References (1)

Publisher
Wiley
Copyright
Copyright © 1979 Wiley Subscription Services, Inc., A Wiley Company
ISSN
0306-686X
eISSN
1468-5957
DOI
10.1111/j.1468-5957.1979.tb01075.x
Publisher site
See Article on Publisher Site

Abstract

(b) To what extent are the solutions produced by the above approaches affected by a time-lag in the payment of corporate taxes? THE ALTERNATIVE v THE TRADITIONAL APPROACH Both the foregoing comments reject the$?tion that one approach is theoretically superior to the other. Levacic and Rebmann-Huber argue that, since the two approaches give identical, unbiased estimates of net present value when there is no time-lag in the payment of tax, both are “equally consistent with the economic rationale of discounting”. Partington argues that my case for the superiority of the alternative approach rests on my particular definition of the present value concept and that the case loses its force with his more general definition, viz. “The present value concept is based on the premise that a project’s cash flows should be converted to a present value equivalent by being discounted at the cost of capital.” To reply to these comments it is convenient again to use a numerical example for simplicity of presentation. L t us assume a Modighani-Miller world (i.e. the absence of bankruptcy costs, personal taxation, etc., since these factors do not affect the basic issue) in which the only effect of debt capital is the

Journal

Journal of Business Finance & Accounting – Wiley

Published: Mar 1, 1979

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