afirmwithnetoperatinglossescarriedforward,thetaxrate
usedforboththecomputationofafter-taxoperatingincome
and costof capitalwillbezeroduring theyears whenthe
losses shelter income.
Theother approach is oftenused when valuingfirms that
alreadyhavepositiveearningsbuthavealargenetoperating
loss carried forward. Analysts will often value the firm,
ignoringthetaxsavings generatedbynetoperating losses,
andthenaddtothisamounttheexpectedtaxsavingsfromnet
operating losses. Often, the expected tax savings are
estimated bymultiplying the taxrate bythe netoperating
loss.Thelimitationofdoingthisisthatitassumesthatthetax
savingsarebothguaranteedandinstantaneous.Totheextent
that firms have to generate earnings to create these tax
savingsandthereisuncertaintyaboutearnings,thisapproach
will overestimate the value of the tax savings.
There are two final points that needs to be made about
operatinglosses.Totheextentthatapotentialacquirercan
claimthetaxsavingsfromnetoperatinglossessoonerthan
thefirmgeneratingtheselosses,therecanbepotentialfortax
synergythatwewillexamineinthechapteronsynergy.The
otheristhatinsomecountriestherearesignificantlimitations
inhowfarforwardorbackoperatinglossescanbeapplied.If
thisisthecase,thevalueofthesenetoperatinglossesmaybe
curtailed.
ILLUSTRATION3.5:TheEffectofNetOperatingLosson
Value: Sirius Satellite Radio
In this illustration, we consider the effect of both net
operatinglossescarriedforwardandexpectedlossesinfuture