How does a company tap the lower cost of equity?
Assuming that the risk and the risk tolerance of investors remain constant, there is no reason that they would demand a higher expected return. Consequently, companies affected positively by the tax reduction may see higher demand for their stock leading to higher stock prices. In the example above, share prices would presumably increase up to the 7.5% after-tax return rate, i.e., to a 9% return taxed at 15%. This would represent share price appreciation of 11% (10% / 9%). Companies could effectively then issue new equity at a premium to previous levels, reducing the dilution (cost) of new shares. We expect to see a significant issuance of hybrid equity product such as perpetual preferred securities which amplify the benefits of the reduced tax rates. Although still considered equity, these securities offer more secure, and usually, higher dividends. Their equity nature will also qualify the dividends for the lower tax rate under the new law. Currently the preferred perpetual market am
