CONCLUSION

When valuing a firm, the cash flows that are discounted should be after taxes and reinvestment needs but before debt payments. This chapter considered some of the challenges in coming up with this number for firms.

The chapter began with the corrected and updated version of income described in Chapter 9. To state this income in after-tax terms, you need a tax rate. Firms generally state their effective tax rates in their financial statements, but these effective tax rates can be different from marginal tax rates. Although the effective tax rate can be used to arrive at the after-tax operating income in the early years, the tax rate used should converge on the marginal tax rate in future periods. For firms that are losing money and not paying taxes, the net operating losses that they are accumulating will protect some of their future income from taxation.