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

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firmsandthechoicewefacebetweenthetwoinvaluation.
Thesecond issue arises usuallywith younger firms and is
causedbythelargelossestheyoftenreport,leadingto net
operatinglossesthatarecarriedforwardandcansavetaxesin
futureyears.Thethirdissuearisesfrom thecapitalizing of
researchanddevelopmentandotherexpenses.Thefactthat
these expenditures can be expensed immediately leads to
much higher tax benefits for the firm.


Effective versus Marginal Tax Rate


Wearefacedwithachoiceofseveraldifferenttaxrates.The
mostwidelyreportedtaxratein financialstatementsisthe
effective tax rate, which is computed from the reported
income in the financial statements.


Thetaxableincomeisusuallybeforeextraordinaryitemsand
goodwill amortization.


Thesecondchoiceontaxratesisthemarginaltaxrate,which
isthetaxratethefirmfacesonitslast(ornext)dollar of
income.Thisratedependsonthetaxcodeandreflectswhat
firmshavetopayastaxesontheirmarginalincome.Inthe
UnitedStates,forinstance,thefederalcorporatetaxrateon
marginalincomeis 35 percent;withtheadditionofstateand
localtaxes,mostfirmsfaceamarginalcorporatetaxrateof
close to 40 percent.


While themarginal taxratesfor most firms in theUnited
Statesshouldbefairlysimilar,therearewidedifferencesin

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