7. 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 corporate finance is investigated. Modigliani–Miller theory and modern theory of capital cost and capital structure by Brusov–Filatova–Orekhova are considered. It is shown that the equity cost, as well as the weighted average cost of capital, decreases with the tax on profit 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 on profit rate at fixed leverage (debt capital fraction w _d) and on the leverage level at fixed tax on profit rate, as well as the dependence of WACC and k _e on company lifetime (age), is made. We have introduced the concept of tax operation leverage. For companies with finite lifetime (finite age), a number of important qualitative effects, which have no analogies for perpetuity companies, are found.