1. CAPITAL BUDGETING IN THE CORPORATION TAX REGIME -- THE CALCULATION OF EQUITY CUT-OFF RATES.
- Author
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Lawson, G. H. and Windle, D. W.
- Subjects
CAPITAL budget ,CORPORATE taxes ,RATE of return ,STOCKS (Finance) ,INVESTMENTS ,FINANCE ,EQUITY (Law) ,DIVIDENDS ,CAPITAL investments ,CASH flow ,CAPITAL gains tax ,INCOME tax - Abstract
The corporation tax does not of itself constitute the whole burden of taxation on investment in the company sector of the company; on the payment of a dividend a company must now deduct and remit standard rate income tax to the tax collectors. Furthermore, gains realized on the selling of shares result in a capital gains tax assessment on the seller. These three taxes on private investment have a direct impact on the prospective rate of return which companies should seek on equity financed capital investment projects. The purpose of this paper is to outline the factors which determine the cut-off rate with which a company's net of corporation tax (relieved, as the case may be, by investment incentives) return on investment should be compared. From a computational standpoint this purpose may be alternatively described as the determination of the rate of discount for discounting cash-flows (of a company) which are stated net of corporation tax and investment incentives. From a computational standpoint it is convenient to calculate the net of corporation tax return to a company because, under the new system of taxation, the investment incentives (other than cash grants to which this point has no relevance) can be set against corporation tax only. Hence an equity cut-off rate needs to embody an allowance for income tax and capital gains tax. [ABSTRACT FROM AUTHOR]
- Published
- 1967
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