Statutory tax rate in WACC
Can someone please explain as to why we use statutory tax rate (instead of the effective in the calculation for WACC?? One reason I could think of is that statutory is more normalized.
anyone??
I'm going to bump this because I came on to ask a similar question about WACC. A colleague of mine states that WACC is tax adjusted to account for the CAPM which is implicitly tax effected. I've always thought that the cost of debt was tax effected to account for tax benefits. If it is the former, then the reason we use say 39% is because we assume that the purchaser is gaining an incremental benefit from the company, that is to say that your company should be taxed at the rate of the next dollar earned. Lower tax rates in US firms are largely related to credits and foreign operations. If you can make the argument that your tax should be lower, then by all means run with it and get ready for battle on review.
It is always the cost of debt that is tax effected..to account for the interest tax shield.
Can anyone answer as to why we use effective tax rate for calculation of FCF whereas Statutory for calculation of WACC???
bump. does anyone know the answer?
"In doing projections, it is far safer to use the marginal tax rate since the effective tax rate is really a reflection of the difference between the accounting and the tax books. By using the marginal tax rate, we tend to understate the after-tax operating income in the earlier years, but the after-tax tax operating income is more accurate in later years If you choose to use the effective tax rate, adjust the tax rate towards the marginal tax rate over time." (A. Damodaran)
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