tag:blogger.com,1999:blog-8152901575140311047.post530103073966988446..comments2024-09-09T08:18:28.688-04:00Comments on Musings on Markets: The Tax Dance: To Pass Through or Not to Pass Through Income?Aswath Damodaranhttp://www.blogger.com/profile/12021594649672906878noreply@blogger.comBlogger13125tag:blogger.com,1999:blog-8152901575140311047.post-12209573953541488432015-04-03T04:34:13.032-04:002015-04-03T04:34:13.032-04:00Dear Aswath,
My question is not related to tax co...Dear Aswath,<br /><br />My question is not related to tax complications under the pass through entity structure. I am looking for answer on how to go about valuation using pre-tax cash flows.<br /><br />I have read many articles and all seem to suggest post-tax cash flows. If at all pre-tax WACC needs to be arrived at, it should be under an iterative process keeping the ultimate valuation same and putting a goal seek on the WACC using pre-tax cash flows.<br /><br />Would highly appreciate if you could direct me to the right approach to arrive at the valuation using pre-tax WACC/ cash flows. In any of your publications, or any others have discussed this, kindly direct me to them. <br /><br />highly appreciate your help, as always.<br /><br />thank you!<br />Rishi SoniAnonymoushttps://www.blogger.com/profile/05402972051826329485noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-16562866054230999282014-09-27T13:38:41.752-04:002014-09-27T13:38:41.752-04:00I would net option entitlements in calculating bu...I would net option entitlements in calculating buy backsAnonymoushttps://www.blogger.com/profile/15809982658076595595noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-54816069574989328142014-09-23T11:58:16.613-04:002014-09-23T11:58:16.613-04:00Hi Professor,
So to clarify: In your valuation of...Hi Professor,<br /><br />So to clarify: In your valuation of a Pass Through Entity, you do not use a cost of debt because you're assuming a Pass Through Entity does not take on/benefit from debt. Instead, you use a modified cost of equity formula to discount cash flows?<br /><br />ThanksAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-78757735016385334832014-09-19T14:25:05.523-04:002014-09-19T14:25:05.523-04:00Professor : I respect your valuation/s methodology...Professor : I respect your valuation/s methodology a lot and you are doing a very great service to people in this space - Truely Commendable!<br /><br />About Risks in stock= BABA : I am sure you may have spent lot of time to assess the risks but the Cayman Islands and the complex (= so so questionable) BABA IPO ownership structures and PR-China Citizenship ownership mandates so the variable-interest-entities etc have no precedence . Can you kindly please have a article and few examples ( may be dummy ) of valuations so that we can learn them ? I was reading URL = http://amigobulls.com/articles/alibaba-ipo-who-owns-the-chinese-giant . I am not convinced that I have seen enough discussion in your previous articles about how to assign "calculated risk factors" to cater such cayman island deals while valuations . Can you kindly see that such out of blue complex structures are properly assessed while any valuation mathematics for any company which it is getting valuation. I can see only close comparable in ( approximately nearer to ) Software space that is Oracle=ORCL which has so many such non US corporations outside US. Was Oracle also valued correctly ? Somehow I always doubled the whole Oracle's stock price always.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-20819897937166016742014-09-12T01:40:21.703-04:002014-09-12T01:40:21.703-04:00MLPs are not in fact required to pay out 90% or an...MLPs are not in fact required to pay out 90% or any other fixed percentage of their income, unlike REITs.Igor Greenwaldnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-25943189990686751952014-09-03T12:14:30.633-04:002014-09-03T12:14:30.633-04:00The taxes that I am using are accrual taxes, since...The taxes that I am using are accrual taxes, since it is easiest to work with, but the effective tax rate can be modified as a cash tax rate on cash income.Aswath Damodaranhttps://www.blogger.com/profile/12021594649672906878noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-14874045721717809072014-09-02T15:24:04.477-04:002014-09-02T15:24:04.477-04:00Thank you for including your spreadsheet. Does thi...Thank you for including your spreadsheet. Does this use cash taxes or the provision for income tax expenses (from the Income Statement)? Tim Gaumernoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-7887746781751679812014-09-02T09:46:36.088-04:002014-09-02T09:46:36.088-04:00Anonymous,
If you are worried about the the implic...Anonymous,<br />If you are worried about the the implicit assumptions of tax effecting your cost of capital, the best choice is to do an adjusted present value valuation of the company, where you use the unlevered cost of equity to first value the company and then bring in the effects of debt explicitly: by taking into account the tax benefits from interest expenses as a plus and the expected bankruptcy cost as a minus. I have a fuller explanation in my corporate finance & valuation books.Aswath Damodaranhttps://www.blogger.com/profile/12021594649672906878noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-45253824116981959862014-09-02T09:44:57.413-04:002014-09-02T09:44:57.413-04:00Maria,
I think it is fixed now. It must have been ...Maria,<br />I think it is fixed now. It must have been an old version of the spreadsheet. Thank you for noticing it.Aswath Damodaranhttps://www.blogger.com/profile/12021594649672906878noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-62656663962198593502014-09-02T06:00:48.632-04:002014-09-02T06:00:48.632-04:00Thanks for your response. One thing I've take...Thanks for your response. One thing I've taken to doing lately which is kind of related is to use the pre-tax WACC to value cash flows that include the tax shields of debt. I've been doing this because I've never been completely comfortable with the simplicity of the (1-t) in the WACC equation and prefer to use actual tax forecasts. Previously, I used a compressed APV-like method, but that didn't scale up the implied cost of equity enough for the leverage (assuming a zero beta of debt). I used the pre-tax WACC on a couple of simple models including the debt tax shields and it checked out, but I'd be curious to hear your thoughts.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-68098317603429103452014-09-01T22:59:05.138-04:002014-09-01T22:59:05.138-04:00Hi Professor- Should the waccpassthrough.xls file ...Hi Professor- Should the waccpassthrough.xls file have an extra column for the unlevered beta to be used when calculating the Post-personal tax cost of Equity and the Pre-tax cost of Equity for the pass through entities? Right now those cells are using the levered beta of 0.99 instead of the unlevered beta of 0.85 in the example you used for the real estate development company. Thanks!Maria Claranoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-43358564632562900232014-09-01T19:32:22.921-04:002014-09-01T19:32:22.921-04:00I considered just scaling up the cost of capital f...I considered just scaling up the cost of capital for the tax benefit but here is the reason that I did not do this. Debt is a choice and it is a good choice for the taxable entity, because of the tax benefit. If you don't get a tax benefit, it is best not to borrow money and I think it makes more sense to focus on an unlevered cost of equity as your discount rate.<br />I see your point about unlevering betas and the debt beta of zero, but even assuming a debt beta does not change the unlevered beta much, at least at the sector level.<br />Starting next year, I plan to put this dataset on my website as well and report both the cost of equity and capital numbers.Aswath Damodaranhttps://www.blogger.com/profile/12021594649672906878noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-27752782874703036712014-09-01T18:30:57.013-04:002014-09-01T18:30:57.013-04:00Hi - if understand correctly, you suggest using an...Hi - if understand correctly, you suggest using an unlevered beta to compute the cost of equity when valuing the cash flows of a pass through entity. I understand where you're going with this, but would it not be better to use a pre-tax version of the WACC (no 1-d in the equation)? It seems like using the unlevered beta assumes a kind of Modigliani-Miller debt/equity equivalency, but in practice we usually assume a zero beta of debt in unlevering, so the pre-tax WACC doesn't really conform to the MM principle even without the tax shields of debt. Using a pre-tax WACC, you would capture the increased required return to equity from the leverage, ultimately leading to higher total required return. No?Anonymousnoreply@blogger.com