Impact of tax rate on cost of equity
I understand why changes in the corporate tax rate impact WACC from a cost of debt perspective since we multiply CoD by (1 - tax rate) to reflect the impact of the interest tax shield.
However, I'm struggling to understand why a change in the tax rate would affect cost of equity (as BIWS guides claim). If we're looking at CAPM, the only place the tax rate could conceivably have some impact is the beta calculation. The guides claim that since our calculation to relever industry average unlevered beta will now use the higher tax rate, the final levered figure will come out lower. However, wouldn't we be applying the same tax rate when we initially unlever those betas?
Or, is the idea that we use the old tax rate to unlever historical betas since they reflect historical market activity, but we apply the new tax rate to relever the average industry beta since that's where we expect our company's beta to reach over time?
I think tax rate is included in levered ß which should be unlevered ß * (1 +D/E *(1-tax)) if i recall correctly, so this would be reflected in the cost of equity
Aliquid dolores sed aut et quaerat tenetur rerum. Quo id sed id quo voluptatem ducimus sequi. Officiis delectus consequatur ad adipisci.
Aliquam voluptas neque iste quis temporibus. Sequi architecto eligendi quos voluptatem dolores. Soluta est ut accusamus veritatis ea nostrum. Atque eius voluptate cumque vero. Enim expedita est quas aut ut at.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...