We analyze a general business tax in an uncertain economy. Our tax system allows for a time-dependent tax rate and to this end we incorporate a generalized allowance for corporate equity (ACE). The generalized allowance is given by a fraction of the product of interest rate and book value of the...

In capital budgeting problems future cash-flows are discounted using the expected one period returns of the investment. In this paper we establish a theory that relates this approach to the assumption that markets are free of arbitrage. Our goal is to uncover implicit assumptions on the set of...

A simple counterexample shows that the WACC formula developed by Miles and Ezzell can be used to create an arbitrage opportunity. The only consequence to be drawn is that their WACC approach cannot be applied under the circumstances assumed by Miles and Ezzell. We show how the WACC theory has to...

In a typical LBO debt is reduced by a substantial part of the firm's cash flow. The object of the paper is to analyze whether the tax advantage of this debt transaction plan can be evaluated using the WACC or the APV method. It turns out that none of them is appropriate, and we will provide a...

We demonstrate that in a CAPM economy Homogeneity,Walras' Law, and the Tobin Separation Property characterize market demand on finite sets of prices. Consequently, for any number n there exist CAPM economies which have at least n equilibria and hence have n different beta pricing formulas....

In this paper we evaluate an indivisible investment project that is carried out in a corporation under very simple premises. In particular, we discuss a one period model with certainty, the pure domestic case and proportional tax rates. Surprisingly, the decision problem turns out to be rather...