cumulated deferred tax liability of $200 million, we can
compute the deferred tax liability by the end of the fifth year:
Weassumethatthefirmwillpay thisdeferredtaxliability
afteryear5,butspreadthepaymentsover 10 years,leadingto
a present value of $167.45 million.
Notethatthepaymentsdonotstartuntilthesixthyearand
hencegetdiscountedbackanadditionalfiveyears.Thevalue
of the firm can then be estimated.
Effect of Net Operating Losses
Forfirmswithlargenetoperatinglossescarriedforwardor
continuing operating losses, there is the potential for
significanttaxsavingsinthefirstfewyearsthattheygenerate
positive earnings. There are two ways of capturing this effect.
Oneistochangetaxratesovertime.Intheearlyyears,these
firmswillhaveazerotaxrateaslossescarriedforwardoffset
income.Asthenetoperatinglossescarriedforwarddecrease,
thetaxrateswillclimbtowardthemarginaltaxrate.Asthe
tax rates used to estimate the after-tax operating income
change,theratesusedtocomputetheafter-taxcostofdebtin
thecostofcapitalcomputationalsohavetochange.Thus,for