After-Tax Discounting: A Research Edge

  • Hongtao Guo Department of Accounting and Finance, Bertolon School of Business, Salem State University

Abstract

This research note addresses after-tax discounting for pricing assets. Specifically, it analyzes the appropriate way to discount after-tax payoffs from assets that trade in capital markets in which both taxable and tax-free investors can buy and sell both taxable and tax-free instruments.  The effect of the tax status of the investor and the tax status of the financing tool that an investor uses on price of an asset are discussed. Secondly, it derives the proper after-tax discount rate to use in the risk neutral valuation method for pricing assets that have state-contingent payments, typically structured in a lease based transaction. Dynamic state-contingent payoffs and cash flow processes are developed. Pre-tax discounted price, after-tax discounted payoffs are considered, then after-tax discount rate is derived. Included in this analysis of state-contingent discounting is the effect of depreciation expense, the only expense associated with the use of the asset, on after-tax discount rates. 

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References

Al-Abadi, M. I., & Al-Sabbagh, O. W. (2006, October). Interest rate sensitivity, market risk, inflation and bank stock returns. Journal of Accounting - Business & Management, 13(1), 1-13.
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Published
2020-05-01
How to Cite
GUO, Hongtao. After-Tax Discounting: A Research Edge. Journal of Accounting, Business and Management (JABM), [S.l.], v. 27, n. 1, p. 86-100, may 2020. ISSN 2622-2167. Available at: <http://journal.stie-mce.ac.id/index.php/jabminternational/article/view/565>. Date accessed: 10 aug. 2020. doi: https://doi.org/10.31966/jabminternational.v27i1.565.
Section
Articles

Keywords

tax analysis, discount rate, asset pricing, lease, state-contingent payoffs, depreciation