Personal taxes, shareholder valuation of riskless corporate taxable cash flows, and management investment decisions

Abstract

Purpose

To analyse the net present value (NPV) rule for corporate investments incorporating shareholder personal taxes, under the classical system of taxing corporate profits.

Design/methodology/approach

The after‐tax payoffs to shareholders are calculated, comparing immediate distribution as dividends of corporate funds available for investment with future after‐tax dividend distributions if corporate funds are invested.

Findings

Shareholders will disagree on the optimal corporate NPV rule. If, as in widely held public companies, corporate management are unaware of the marginal personal tax rate of shareholders, then the only rule which will accept investment projects that no shareholder would want the company to reject, is the rule which discounts after‐corporate‐tax cash flows at a before‐tax discount rate.

Research limitations/implications

The analysis is based on the classical system of taxing corporate profits. A number of countries have adopted an integrated system of corporate taxation. The analysis may or may not extend to such alternative systems.

Practical implications

Simplifies the choice of NPV rules for corporate management, under a classical tax system.

Originality/value

The widely held view that after‐corporate‐tax discount rates should be used in discounting after‐corporate‐tax cash flows is shown to be inadequate.

Citation

Winsen, J.K. (2005), "Personal taxes, shareholder valuation of riskless corporate taxable cash flows, and management investment decisions", International Journal of Managerial Finance, Vol. 1 No. 2, pp. 123-136. https://doi.org/10.1108/17439130510600839