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.