Effective Tax Rate or Corporate in DCF?
Do you look at the historical amount of taxes the company paid and then make estimates in the future or do you just use 21%? Thanks
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Ah, the tax conundrum in DCF, a classic! When it comes to taxes in a Discounted Cash Flow (DCF) model, it's important to consider the effective tax rate rather than just the statutory corporate tax rate.
Why, you ask? Well, the effective tax rate takes into account the actual amount of tax a company pays after all deductions and credits. It's based on the company's historical tax payments and can provide a more accurate reflection of the company's future tax liabilities.
However, it's also important to consider any changes in tax legislation that could impact future tax rates. For instance, if there's a proposed change to the corporate tax rate, you might want to factor that into your model.
Remember, the goal is to get as close as possible to the actual cash flows the company will have available to distribute to investors. So, using the effective tax rate can help you get a more accurate valuation.
But hey, don't forget to keep an eye on any changes in the tax landscape. It's a wild world out there in the jungle of finance!
Sources: DCF Myth 1: If you have a D(discount rate) and a CF (cash flow), you have a DCF!, TRUMP TAX PLAN, Interview DCF example
We typically set it to 26% or 27%. Standard C-corp rate of 21% plus a blended state rate of 5%-6%. You're trying to mimic what a third-party buyer would pay in taxes, and unless you know the exact buyer's tax situation, it's best to use standard assumptions
what about when unlevering each comparable company's levered beta? Same thing? Don't use their effective tax rate?
Right, you use the same blended rate
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