European Financial Management · 1998 · 11 citations · 0 references
Corporate TaxLawCost Of CapitalInfrastructure InvestmentGovernment SpendingCorporate TaxationCorporate Risk ManagementEconomic AnalysisFinancingTax PolicyTax LawPayout PolicyEconomicsPublic ExpenditureEnhanced M‐m ModelTax AvoidanceFinancePublic FinanceFinancial EconomicsFederal Income TaxEconomic PolicyImplicit CostReal InvestmentAccounting PolicyBusinessCorporate Tax ClaimPrivate SectorM‐m PropositionsFinancial StructureCapital StructureCorporate Finance
The study rederives the M‑M propositions by incorporating the government’s corporate tax claim into the firm’s capital structure analysis. The paper investigates how conflicting interests among claimholders affect investment decisions. The authors compute the firm’s pre‑tax value as the sum of present values of equity, debt, and government claim, and use this model to evaluate trade‑offs among government policies that promote socially optimal investment. The resulting enhanced M‑M model better reflects modern financial realities and has important implications for financial analysis practice.
The corporate tax claim of the government is internalised in the analysis of the corporation's capital structure. In this framework the M‐M Propositions are rederived. In the proposed approach, the current value of the firm is calculated on a before‐tax basis, and is equal to the sum of present values of equity, debt, and government claim. An enhanced M‐M model is derived, which is more representative of modern financial realities, and has significant implications for the practice of financial analysis. The paper highlights the potential conflict of interest among the different claimholders in making an investment decision. The model presented here allows us to analyse the tradeoffs among various policies available to the government to encourage investments to their socially optimal level.