Cost of Capital in the Courts

Ad valorem taxes are taxes on the possession of property (as opposed to faxes on income or taxes on transfers of property). The term "ad valorem" means "according to value." For ad valorem tax purposes, most income-producing properties are assessed value by some variation of the income approach, and thus cost of capital plays an important role.

1. Altliough state statutes use a variety of terras relating to ad valorem taxes, they all boil down to what standard of value?

a. Market value.

b. Investment value.

c. Fair val ue.

d. Intrinsic value.

2. In general, the preferred measure of return for ad valorem taxation is:

a. F.BTT.

b. EBITDA.

c. Net income.

d. Net cash flow.

3. Many ad valorem jurisdictions impose variations on the definition of income to which the cost of capital is to be applied to estimate value, in which case the analyst needs to make adjustments to the cost of capital to be consistent with the statutory or regulatory definition of income.

Some assessors like to account for the effect of ad valorem taxes by adding back the percentage relationship of tax to market value to trie discount rate.

The size premium is often a factor in cost of equity for ad valorem taxes.

Traditionally, property tax assessors have used the capital structure at book value rather than market value as the appropriate measure of the employment of capital.

7. If trie after-tax cost of capital is 10% and the tax rate is 40%, compute the cost of capital on pretax returns.

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