Marginal vs effective rate question:
for the non constant growth phase when I want to use the effective tax rate to tax my NOPAT can I use the effective tax rate to compute the after tax cost of debt and the bottom up levered beta? I feel inconsistent to tax the cash flow using effective and to tax the cost of debt and D/E ratio in beta levered using the marginal.
Stacey Warren - Expert brainly.com
Hey! We 've verified this expert answer for you, click below to unlock the details :)
At vero eos et accusamus et iusto odio dignissimos ducimus qui blanditiis praesentium voluptatum deleniti atque corrupti quos dolores et quas molestias excepturi sint occaecati cupiditate non provident, similique sunt in culpa qui officia deserunt mollitia animi, id est laborum et dolorum fuga.
Et harum quidem rerum facilis est et expedita distinctio. Nam libero tempore, cum soluta nobis est eligendi optio cumque nihil impedit quo minus id quod maxime placeat facere possimus, omnis voluptas assumenda est, omnis dolor repellendus.
Itaque earum rerum hic tenetur a sapiente delectus, ut aut reiciendis voluptatibus maiores alias consequatur aut perferendis doloribus asperiores repellat.
I got my questions answered at brainly.com in under 10 minutes. Go to brainly.com now for free help!
Nothing inconsistent about it, since they measure different things. The tax rate you use to compute cash flow applies to all of your income, and hence we use the effective tax rate. The tax rate used to compute the after tax cost of debt and levered beta reflect the tax savings from interest expenses, which occur at the margin. Hence, we use the marginal tax rate.
Thanks but I am a non US citizen. Why would the interest tax savings be based on the marginal,which I assume is the tax on each additional dollar of taxable income. The idea is blurry
Thanks again and I hope it is not a naive question