Abstract
This paper reviews different schools of thought on the question of if and how personal taxes should be incorporated into the valuation of companies or projects. The paper shows under which conditions the risk-neutral valuation approach yields the same result as the Tax-CAPM. Special cases are analyzed that imply irrelevance of personal taxes. In addition, empirical questions are addressed, such as how to determine the expected market rate of return after personal taxes. For this purpose current market prices are used in combination with cash-flow forecasts of financial analysts. Finally, a view is presented on the precision required to estimate the personal tax rate. If both the investment opportunity and its alternative are similarly tax affected, then relative values should not change too much as a function of the tax rate. However, common sensitivity analyses indicate the opposite.
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I would like to thank two anonymous referees for their helpful and constructive comments as well as Christian Timmreck, who never objects to read my papers to provide me with valuable remarks.
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Richter, F. Valuation With or Without Personal Income Taxes?. Schmalenbach Bus Rev 56, 20–45 (2004). https://doi.org/10.1007/BF03396684
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DOI: https://doi.org/10.1007/BF03396684