The Capital Structure and Corporate Tax Rate

The capital structure

The adopted capital structure affected the cost of capital. Domino’s followed the best practice in estimating the cost of capital and used, where possible, market value of debt and equity. The market value of equity was determined using the number of shares outstanding and the market share price at the time of estimate. The market value of debt, however, was not as easily observable as many of the company’s debt was not tradeable. Accordingly, the company used the book value of debt as a measure of the market value of debt.

The corporate tax rate

As the interest expenses were tax-deductible, the cost of debt was typically estimated on an after-tax basis. The most accurate tax rate to use was the effective tax rate calculated as tax expenses divided by taxable income. Where the effective tax rate was not significantly different from the statutory corporate tax rate, Domino’s used the statutory tax rate in its estimate of the cost of capital.