Financial Modelling

Question 1

Which tax rate to use for a company?

Answer 1

Look at footnotes for Income Taxes: Reconciliation of statutory tax rate to firm’s effective rate –> This footnote provides a reconciliation that explains differences between statutory tax rate and the firm’s effective tax rate. The reconciliation starts with the federal statutory tax rate and then shows each component of pre-tax income that is not taxed at the statutory rate to derive the effective tax rate

Question 2

Financial analysts need to analyse the components of
deferred tax liabilities and decide, on a case-by-case basis,
whether the tax liabilities are likely to reverse over time or
not. Factors to consider in making this decision are:

Answer 2

• Future tax rates, tax laws and accounting standards
• Firm’s growth rate
• Non-recurring items