8. The Role of Taxing and Leverage in Evaluation of Capital Cost and Capitalization of the Company

In this Chapter, the role of tax shield, taxes, and leverage in the modern theory of the corporative finance is investigated. Modigliani–Miller theory, as well as modern theory of capital cost and capital structure by Brusov–Filatova–Orekhova is considered. It is shown that the equity cost as well as the weighted average cost of capital decreases with the tax rate, while the capitalization increases. The detailed investigation of the dependence of the weighted average cost of capital WACC and the equity cost k_e on the tax rate at fix leverage (debt capital fraction w_d) and on the leverage level at fix tax rate, as well as the dependence of WACCand k_e on company lifetime is made. We have introduced the concept of tax operation leverage.