|Author||Topic: TAX in wacc|
|I am having a hard time getting what the TAX in WACC should be, effective or marginal. I also have a thought process that is making me thing it should be marginal for corporate finance purposes but effective for FCFF valuation.
Because in corporate finance we are analyzing a marginal project, and thus taxes would be happening at the marginal rate. While in FCFF we would be analyzing the entire firm and taxes would be at the effective rate.
I hope someone can explain which rate is the proper one, and maybe take the time to show a numerical example to prove that it is the correct one to you.
|This is my understanding of it. You want to use a tax rate that is the closest to what the company will probably pay in the future, meaning it is based on continuing operations.
Effective tax rate can be manipulated by write downs, losses and large one off expenses. So, unless you know for sure that the effective tax rate represents continuing operations you should stick with the marginal tax rate.