Costo de Capital cuando dividendos son Deducible
| Autor | Ignacio Vélez Pareja - Julián Benavides Franco |
| Cargo | Universidad Tecnol´ogica de Bolivar, Cartagena, Bolivar, Colombia - Universidad Icesi, Cali, Valle. Colombia |
Cost of Capital when Dividends are
Deductible
(Custo de Capital quando os Dividendos s˜
ao Dedut´ıveis)
Ignacio Velez-Pareja*
Juli´
an Benavides-Franco**
Abstract
Tax savings and the discount rate we use to calculate their value are involved in the calcu-
lation of cost of capital. Based on previous findings, we derive a general approach to cash
flow valuation that take into account any kind of tax shields related to the financing deci-
sion of a firm and any date when they are earned. They can be used to introduce any type
of externality that creates value throught axsavings not captured by neither the cost of debt
nor the cost of equity. This paper develops the formulations for the cost of capital when
dividends, interest on equity or monetary correction of equity are deductible as it happens
in Brazil. It shows that when properly done most known valuation methods are consistent
and give identical results. Also, the paper argues that when dividends are tax deductible,
optimal leverage is lower and equity value is higher.
Keywords:corporate finance; WACC; interest on equity; tax savings; tax shields; cost of
equity; discount rate for tax savings.
JEL codes: D61; G31; H43.
Resumo
As economias tribut´arias e a taxa de desconto que usamos para calcular o seu valor est˜ao
envolvidos no c´alculo do custo de capital. Com base em resultados anteriores, n´os deriva-
mos uma abordagem geral para avaliac¸˜ao de fluxo de caixa que considera qualquer tipo
de benef´ıcios fiscais relacionados com a decis˜ao de financiamento de uma empresa e qual-
quer data em que sejam auferidos. Eles podem ser usados para introduzir qualquer tipo
de externalidade que cria valor por meio de economias tribut´ariasn ˜ao capturadas nempelo
custo da d´ıvida nem pelo custo do capital pr´oprio. Particularmente, n ´os desenvolvemos as
formulac¸ ˜oes para o custo de capital quando os dividendos, juros sobre capital pr´oprio ou
correc¸ ˜ao monet´aria de capital pr´oprio s˜ao dedut´ıveis, como acontece no Brasil. Isso mostra
que, quando usados corretamente, os m´etodos de avaliac¸˜ao mais conhecidos s˜ao consis-
tentes e d˜ao resultados idˆenticos. Al´em disso, o artigo argumenta que quando os dividendos
s˜ao dedut´ıveis, a alavancagem ´otima ´e menor e o valor do capital acion´ario ´e maior.
Palavras-chave:financ¸as corporativas; WACC; juros sobre capital pr ´oprio; economias tri-
but´arias; benef´ıcios tribut´arios; custo do capital pr ´oprio; taxa de desconto para economias
tribut´arias.
Submitted in October 2010. Accepted in May 2011. The article was double blind refereed and
evaluated by the editor. Supervising editor: Ricardo P. C. Leal.
*Universidad Tecnol´ogica de Bolivar, Cartagena, Bolivar, Colombia. E-mail: nachovelez@
gmail.com
**Universidad Icesi,Cali, Valle. Colombia. E-mail: jbenavid@icesi.edu.co
Rev.Bras. Financ¸as,Rio de Janeiro,Vol. 9, No. 3, September2011, pp. 309–334
ISSN16 79-0731, ISSN online 1984-5146
c
2011 SociedadeB rasileirade Financ¸as
Velez-Pareja,I., Benavides-Franco, J.
1. Introduction
Since the seminal contribution of Modigliani & Miller (1963) the value of
Tax Savings, TS , has been recognized by the literature. Most of the analyses,
including Modigliani & Miller (1963), have focused on the Tax Savings of Debt.
One exception is DeAngelo & Masu lis (1980) that consider T S due to investment
incentives and depreciation. When calculating Tax Savings, T S, we are con fronted
with a strange mix of accounting accrual an d market value when involving T S in
the calculation of the Weighted Average Cost of Capital, W ACC or the Cost of
Equity, Ke. Firms earn the right to T S once they accrue the interest expense and
they actually earn the T S when taxes are paid (V´elez-Pareja et al., 2008).
Tax savings and the discount rate (ψ) we use to calculate their value are in-
volved in the calculation of W ACC and K e. Textbook W AC C formulation is a
very special and unique case that is not typical. Based on previous findings, we
derive a general approach to those formulas that take into account any kind of T S
related to the financing decision of a firm and any date when the T S is earned.
These formulations can be used to introduce any type of externality that creates
value through tax savings not captured by neither the cost of debt nor the cost of
equity.
Taggart (1991) developed some expressions with these purposes. He consid-
ers corporate and personal taxes; we only consider corporate taxes. There is no
derivation of the formulas in his work. Inselbag & Kaufold (1997), use the same
expressions to compare different discount methods to value a firm . Tham & V ´elez-
Pareja (2002) and Tham & V´elez-Pareja ( 2004) derive the proper formulations for
Ke and W AC C. V´elez-Pareja (2010) use these derivations to incorporate the
effect of losses in exchange rate, of losses carried forward, of unpaid taxes, of
Presumptive Income Taxation and the effect of inflation adjustment of book value
of equity when adjusting financial statements by inflation in tax savings. We de-
rive the explicit and general formu lation to include other sources of T S and their
discount rate, ψ.
These refinements for calculating K e and WAC C are based on Modigliani &
Miller propositions and they are just a tuning up of them to include idiosyncratic
conditions found in different markets. In this paper we study the impact of any new
source of tax savings. In particular, we study the specific case of Brazil, one of the
major economies in the world, which allows a partial deduction of dividends in the
Profit and Loss statement. So me other countries also allow (or allowed) the partial
deduction of dividends, such as Iceland, Czech Republic and Germany. Although
the tax deduction we consider here is novel, and absent in previous works, the
basic ideas posed by M&M are the same. However,when valuing firms or projects
in such environments (e.g. Brazil, Ireland, etc.) our model captures a source of
value previously ignored.
When Brazil used to adjust the financial statements by inflation, they (as many
other economies) allowed for adjustment of book value of equity using an index
linked to the inflation rate. According to Zani & Ness (2001) after many years of
310 Rev. Bras. Financ¸as, Rio de Janeiro, Vol. 9, No. 3, September 2011
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