A community for students.

Here's the question you clicked on:

55 members online
  • 0 replying
  • 0 viewing

anonymous

  • 5 years ago

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.

  • This Question is Closed
  1. anonymous
    • 5 years ago
    Best Response
    You've already chosen the best response.
    Medals 0

    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.

  2. anonymous
    • 5 years ago
    Best Response
    You've already chosen the best response.
    Medals 0

    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

  3. Not the answer you are looking for?
    Search for more explanations.

    • Attachments:

Ask your own question

Sign Up
Find more explanations on OpenStudy
Privacy Policy

Your question is ready. Sign up for free to start getting answers.

spraguer (Moderator)
5 → View Detailed Profile

is replying to Can someone tell me what button the professor is hitting...

23

  • Teamwork 19 Teammate
  • Problem Solving 19 Hero
  • You have blocked this person.
  • ✔ You're a fan Checking fan status...

Thanks for being so helpful in mathematics. If you are getting quality help, make sure you spread the word about OpenStudy.

This is the testimonial you wrote.
You haven't written a testimonial for Owlfred.