悉尼大学资本市场与公司财务课件Lecture7.ppt

CAPM under an imputation system of tax The value of franking credits paid in the overall market is difficult to estimate, and there is no market index available that provides this information It is possible to convert an accumulation index that does not take into account franking credits into one that does, although this still presents problems, in that: Not all stocks pay franked dividends Stocks that pay franked dividends do not necessarily issue franking credits at the full corporate tax rate Under the imputation system if discounting forecast cash flows estimated before tax: if discounting forecast cash flows estimated after tax: where: re,rd = expected return on equity and debt before tax E,D,V = market value of equity, debt the firm, respectively T = effective rate of company tax on companies free cash flow g = proportion of franking credits valued by the company’s shareholders (8.8) (8.9) Incorporating the effect of tax into the company cost of capital (cont) Example 8.8 Using the following information for Tabcorp Holdings Ltd estimate the company cost of capital Estimated required rate of return on equity = 12.2% Estimated cost of debt = 7.75% Net debt = $2138.4m Number of shares = 524.9 million Share price= $17.15 _______________________________________________ Assume: 1) Market value of equity = 524.9m x 17.15 = $9002.04m 2) Market value of firm = 9 002.04m + 2138.4m = $11 140.44m Incorporating the effect of tax into the company cost of capital (cont) CAPM under an imputation system of tax The CAPM also needs to be redefined so that the value of franking credits is included in returns on both the stock and on the market: where: rt? = expected return on stock j before personal tax, including the value of franking credits used rft = risk-free rate of return over period t rmt = return on the market over period t tmt = value of franking credits paid on stocks in the index βj = beta of stock j (8.10