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Hello ,I have an inquiry about the revision mock exam question at opentuition.com
The question is that:
“Which of the following statement regarding CAPM are not correct?”and one of the answer is
“CAPM ignore the effect of corporate tax”Why this answer is not correct? as CAPM assume the market is perfect capital market-tax is ignored,can find from the article below
Thank you.
A prefect capital market ignores personal taxes, but it does not ignore corporate (company) tax.
Thinks about it – if company tax was ignored then the asset beta formula would not have ‘t’ in it (and all the CAPM theory would have no relevance at all in real life, because companies do pay tax!!).
(In fact, the theory has been developed (by Modigliani and Miller) to take account of personal tax, but dealing with this is not in the syllabus 🙂 )
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