Information Technology Reference
In-Depth Information
assets is resolved in the first next period when firms incur enough profits, and if not,
in consequent next periods. We also assume that firms keep the payout ratio constant
at the same value in the past five years if net income after-tax is positive.
5
Effects on Firm Valuation of a Corporate Tax Rate Cut
In Table 1 we report the year-by-year results of our simulations. We compare using a
ratio of
V
0
, the valuation based on the current effective tax rate of 40.87%, to
V
1
, the
hypothetical valuation under the effective tax rate of 35%, which is equivalent to an
approximate 5 percent cut in the corporate tax rate in equation (9).
17
Note
V
1
is the
average value for each firm computed from 10,000 simulation paths. We report
empirical firm distributions of the ratio
V
1
/
V
0
, called VR in Table 1, which is a
hypothetical value under the tax rate cut to the value when the current tax rate is kept
intact. All the calibrated values are computed each year for June 30. For example, for
calendar year 2000, balance sheet data from March 2000 is used, which is from
financial statements of firms for fiscal year 1999. With these computed ratios we
contrast firms which are expected to increase values by a tax cut (lower half of Table
1) with firms which are expected to decrease values (upper half of Table 1).
Table 1.
Year-by-Year Frequency Distribution of Intrinsic Value Ratio
Intrinsic Value is defined as
(V
at hypothetical tax rate of 35%)/
(
V
at the ongoin
g
effecti
v
e tax ra
t
e of 40.
8
7%)
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
VR
0.8
7.48
7.61
9.24
10.26
8.53
4.94
4.88
3.71
2.83
6.06
0.80<VR
0.85
1.52
1.24
1.93
1.26
1.81
1.33
0.73
1.16
0.29
0.61
0.85<VR
0.90
2.33
2.19
2.69
2.69
1.89
2.21
1.60
1.16
0.80
1.07
0.90<VR
0.95
2.63
2.28
3.03
3.20
2.87
2.14
1.68
1.31
1.23
1.61
0.95<VR
1.00
3.24
3.14
3.36
4.12
3.77
2.06
2.55
1.46
1.89
2.00
1.00<VR
1.05
0.00
0.10
0.17
0.25
0.30
0.00
0.07
0.07
0.00
0.00
1.05<VR
1.10
7.08
9.32
9.66
12.20
7.02
12.61
9.18
9.97
12.91
12.13
1.10<VR
1.15
38.52
39.30
33.53
33.22
38.79
45.72
50.91
53.64
55.77
46.35
1.15<VR
1.20
15.67
14.18
11.01
11.86
13.74
13.57
14.20
16.08
15.01
15.66
1.20<VR
21.54
20.65
25.38
20.94
21.28
15.41
14.20
11.43
9.28
14.50
In the table we find that firms with ranges of VR values from 1.10 to 1.15 are
within the modal range. Thus, with an effective 5.87% tax rate cut, the value of the
firm increases from 5% to 10% for firms at the highest frequency, owing both to pure
tax effects and productivity changes due to increased investment. We find that the
most effective case for a VR value exceeding 1.20 displays the largest percentage in
17
In fact, the new bill for reducing the corporate tax rate by 5% passed the Diet in December
2010, but because of the March 11earthquake, the enactment of the bill was delayed until
fiscal year 2012.
