Tax-adjusted discount rates with investor taxes and risky debt

Abstract

This paper derives tax-adjusted discount rate formulas with Miles-Ezzell leverage policy, investor taxes, and risky debt in the context of a standard tax system. This expands on other formulas that are commonly used and that, for example, assume riskless debt or make different tax assumptions. The paper shows that the errors from using these other formulas are material at reasonable parameter values. Expressions are also given for the asset beta and implementation using the CAPM is discussed.