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Valuation
Measuring and Managing the Value of Companies
5th Edition
Chapter 25 Solutions
Taxes
Version 1.0
April 1, 2010
Chapter 25
Question 1
Tax reconciliation table in $ millions Tax reconciliation table in percent
$ million Year 1 Year 2 Year 3 Year 1 Year 2 Year 3
Statutory income tax rate 161.8 154.4 185.4 35.0 35.0 35.0
Protits ($ million)
Tax reconciliation table in $ millions
$ million Year 1 Year 2 Year 3
Chapter 25
Question 2
Panel A Panel B
Assumption: Nonoperating items recognized domestically Assumption: Nonoperating items recognized globally
Year 1 Year 2 Year 3 Year 1 Year 2 Year 3
Tax rates Tax rates
Chapter 25
Question 3
Companies can avoid high domestic tax rates by maintaining earnings in foreign countries inde2nitely. For some companies,
this has led to large cash balances abroad. For instance, Oracle Corporation held 89 percent of its $11.3 billion in cash and
the company pay the difference between local and foreign taxes. But will it? In 2004, the United States passed a temporary
For companies that repatriate in a given year, we do not recommend treating the repatriation as operating. This will distort
the ongoing tax rate for use in performance appraisal and forecasting. If you decide to treat the repatriation as operating, the
tax should be spread over the years incurred.
equivalents overseas of 2009, according to the Wall Street Journal. If a company repatriates earnings, tax law requires that
Losses and tax credit carry-forwards Tax rates
Nonoperating deferred tax liabilities
Check
Chapter 25
Question 5
ToyCo
Total funds invested
Chapter 25
Question 6
When companies grow, they add fixed assets. By using accelerated depreciation on the tax books for new assets, companies can defer taxes.
These deferrals are likely to be highest when organic growth is high. As growth falls and new equipment merely replaces old equipment,
deferrals will drop. In fact, cash taxes can be higher than reported taxes when growth is negative. The company may not pay this higher
rate, however, as shrinking companies oHen generate losses and consequently do not pay taxes.
percent
Year 1 Year 2 Year 3
EXHIBIT 25.9 ToyCo: Tax Reconciliation Table
$ million
Year 1 Year 2 Year 3
Deferred tax assets
Deferred tax liabilities
EXHIBIT 25.10 ToyCo: Deferred Tax Assets and Liabilities
