Discussion of the Pre and Post-Tax Discount Rates and Cash Flows: A Technical Note
Ohio State University - Fisher College of Business
Finance Scholars Group
August 9, 2010
Journal of Applied Research in Accounting and Finance (JARAF), Vol. 5, No. 1, pp. 16-20, 2010
Lonergan (2009) appropriately recommends that “discounted cash flow analysis should be configured on the basis of post-tax cash flows discounted with post-tax discount rates”. We generally agree with his recommendation when it is applied in discounted cash flow valuations, due to accounting conventions that affect post-tax cash flows. However, we show that when valuing cash flows with a well-defined marginal corporate tax rate, the present value of pre-tax cash flows discounted at a pre-tax discount rate exactly matches the present value of post-tax cash flows discounted at a post-tax discount rate. We present analytical examples to demonstrate this equality.
Number of Pages in PDF File: 12
Keywords: discounted cash flow analysis, post-tax cash flow, post-tax discount rate
JEL Classification: M40, M41Accepted Paper Series
Date posted: August 9, 2010
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