Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

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Thus,Ciscoderivesataxbenefitthatis$15millionhigher
because it can expense rather than capitalize R&D.
Completingtheanalysis,wecomputedtheadjustedafter-tax
operatingincomeforCisco.NotethatinIllustration3.2,we
estimated the adjusted pretax operating income.


The adjusted after-taxoperating income canbe written as
follows:


Tax Books and Reporting Books


ItisnosecretthatmanyfirmsintheUnitedStatesmaintain
two sets of books—one for reporting purposes (reported
income)andonefortaxpurposes(taxincome)—andthatthis
practiceisnotonlylegalbutisalsowidelyaccepted.While
the details vary from company to company, the income
reported tostockholders generallyismuchhigher thanthe
income reportedfortaxpurposes.Whenvaluing firms, we
generallyhaveaccesstoonlytheformerandnotthelatterand
this can affect our estimates in a number of ways.



  • Dividingthetaxespaid,whichiscomputedonthetax
    income,bythereportedincome,whichisgenerally
    muchhigher,willyieldataxratethatislowerthan
    the true tax rate. If we use this tax rate as the
    forecastedtaxrate,wecouldovervaluethecompany.

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