How Taxation Affects Financial Decisions of a Firm in an Open Economy

Abstract:

The paper describes a comparative analysis of various ways for financing an enterprise’s investments given profit and dividend taxation. Two mathematical models are considered to see how taxation affects corporate financial decisions. An analysis is carried out to see how investments are financed by using retained earnings or loans. It is shown that with the current tax rates in Russia, capital costs are lower in case investments are made with the use of borrowed funds.