Unlevered BETA - Effective Tax Rate or Corporate Tax Rate
Quick Question! When having the comparables, to calculate the unlevered beta, should I use the effective Tax Rate or the Corporate Tax Rate? In the calculation i am also using there D/E ratio from Bloomberg as well as their effective tax rate. Let me know your comments
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/valquestions/taxrate…
Unfortunately, I've seen cases for both. Definitely curious to hear other people's feedback on this. I'd use the one that makes the most sense for your specific task.
I would stick to marginal if it was me. When you think about all of the tricks a firm can play with reported income and restated earnings it is always more useful to be on the side of caution. This is only one small part of your analysis so any inaccuracies you introduce you should be accounting for with your qualitative assessment anyway.
It helps to calculate D/E yourself, Bloomberg will not always be correct and you will regret it in the 11th hour.
Credited response. Using effective would also presumably backdoor political risk into your beta computation (e.g. risk that tax code stays as is). Political risk should be taken into account but Damodaran's view is that this gets baked into the equity risk premium, not beta. Beta should purely measure the strength of correlation with market returns.
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