PASS-THROUGH TAXATION AND THE VALUE OF THE FIRM (FIRM VALUATION, CAPITAL STRUCTURE)

Much work has been done on the optimal capital structure and valuation of the firm. The literature contains examinations of the valuation and optimal capital structure of the firm under various tax systems. The vast majority of all valuation literature has explored the optimal capital structure and valuation under the double taxation system. The goal of this dissertation is to develop and test valuation equations and optimal capital structure conditions for firms subject to double taxation and pass-through taxation.; The valuation equations developed in this dissertation suggest that the value of a firm subject to pass-through taxation will be higher than the value of a firm subject to double taxation when net operating income is held constant across firms. In addition, it is found that the gain from leverage will be larger for a firm subject to double taxation than for a firm subject to pass-through taxation. The change in value and change in the gain from leverage when tax rates change are also examined. It is found that the change in the value of the firm and the gain from leverage associated with a change in tax rates is different for a firm subject to pass through and a firm subject to double taxation. Finally, it is suggested that firms subject to double taxation continue to exist in the economy because of the unlimited liability often associated with firms subject to pass-through taxation.