A note on the cost of capital and investment evaluation for companies under the imputation tax

Article Abstract:

The 25 May, 1988, Statement of the Federal Treasurer indicated that superannuation funds are to be taxed at 15% from 1 July, 1988. Also, it has become increasingly clear that the cost of tax arbitrage is not so great that it is going to inhibit or prevent those receiving franked dividends, such as offshore investors, from selling the tax credits associated with such dividends. The net result is that franked dividends have the potential for benefitting all investors irrespective of their tax status. The outcome could substantially reduce company tax for Australian companies which in turn can be expected to have an effect on their before-tax cost of capital and on the after-tax cash flows but not on their before-tax cash flows or their after-tax cost of capital. This effect will increase the value of companies paying franked dividends. (Reprinted by permission of the publisher.)

Evaluation, Taxation, Investments, Corporations, Tax credits, Corporations, Australian

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The valuation of projects under the dividend imputation tax system

Article Abstract:

This paper proves that a modified weighted average cost of capital ("WACC") valuation methodology is a rigorous and practicable method of valuing projects and companies under the Australian dividend imputation tax system. This methodology uses an effective tax rate in calculating both the discount rate and the ungeared after tax cash flow. A cash flow after effective corporate tax is shown to be equivalent to a cash plus value of imputation credit stream. Importantly, this valuation methodology is applicable to returns that are non-uniform and of finite duration. Also examined is the discounting of equity returns at the company's cost of equity capital. A worked example is presented to clarify and quantify the effects discussed. (Reprinted by permission of the publisher.)

Methods, Tax policy, Valuation, Discounted cash flow

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Dividend policy and the capital structure under the imputation tax system: some clarifying comments

Article Abstract:

This paper analyses the effects of the imputation and capital gains taxes on the dividend and financing decisions of Australian companies. We develop a framework, consistent with Miller's (1977) approach, in which interactions between dividend and financing decisions can be explored. The significance of these interactions depends on both corporate dividend policy and on the relationship between personal and corporate income tax rates. We conclude that under imputation, dividend decisions are more important relative to capital structure decisions, than under the classical tax system. (Reprinted by permission of the publisher.)

Research, Dividends, Corporate income taxes

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