For valuation purposes, the calculation of the equity cost of capital under an imputation systemshould be reduced by a factor representing, in broad terms

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The imputation system allows for a tax credit (known as a franking credit) to be attached to dividends paid by a company, which enables shareholders to receive a credit for the corporate tax paid by the company on its profits. As a result, the equity cost of capital calculation needs to be adjusted to reflect the fact that some of the taxes paid by the company will be rebated against the personal tax in the hands of the shareholders, which is represented by reducing the cost of equity calculation by a factor of the imputation credit rate. Option A accurately reflects this concept.

For Valuation Purposes, the Calculation of the Equity Cost of Capital