Inflation, tax integration and company valuation: The Latin American case

Popular models for computing hurdle rates and valuation of companies were developed in the context of the USA tax code, which has two peculiar features. First, it computes taxes based on a nominal income basis. Second, it does not allow for integration between corporate taxes on earnings and personal taxes on dividends. Some Latin American countries do not share these characteristics of the USA tax regime. In this paper, we extend the standard formulas for valuation of companies to incorporate the effects of inflation on depreciation and interest expense tax shields, when they are computed under real versus nominal taxable earnings regimes. We also offer a modified, equivalent corporate tax rate formula that properly accounts for integration between corporate and personal taxes.