What costs are included in the calculation of the tax shield. Weighted average cost of capital (WACC)

17.03.2024

Forex portal

Tax Shield

Despite the widespread use of this term in Western countries, in Russia the use of technologies hidden behind this concept is widespread, but not always conscious. In fact, there are several tax shields - that is, those deductions from revenue that allow a company to reduce pre-tax profits. The main ones are two: interest and depreciation tax shield. The first is due to the fact that servicing borrowed funds allows companies to reduce pre-tax profits, and therefore the income tax itself. And this implies that over time, that is, from year to year, there may be savings on income taxes - it is precisely this savings that is called the “tax shield”.

A similar mechanism operates in the case of depreciation. In principle, any expenses, for example, on paying for the rights to use intellectual property objects, allow us to talk about the effect of a “tax shield”, but for the financier the two above-mentioned shields are key. Their use allows you to accurately calculate the price “ceiling” when purchasing new equipment to replace old equipment, analyze the investment project more thoroughly, take a balanced approach to calculating the company’s cash flows, as well as calculate its price and capitalization.

In the Modigliani-Miller theory, all financial flows are perpetuities, and the tax shield for an infinite number of periods is equal to

At the same time, for the weighted average cost of capital of the company Modigliani and Miller obtained the following formula

Using this formula, we calculate WACC in 2008, 2009 and 2010

2008: WACC = 0,2367 (1-0,4789 0,24) = 0,2095;
2009: WACC = 0,2367 (1-0,6999 0,2) = 0,2036;
2010: WACC = 0,2367 (1-0,7076 0,2) = 0,2032.

Thus, WACC in 2008, 2009 and 2010 amounted to 20.95%, respectively; 20.36%; 20.32%.

Tax shield

Unlike income paid to shareholders, interest on borrowed capital is included in production costs and is not taxed (Article 265 of the Tax Code of the Russian Federation), i.e. The after-tax cost of debt falls below the final return. In order to reflect this, the so-called effective cost of borrowed capital is introduced, equal to

Where kf- effective cost of debt; to c1 - cost of borrowed funds; t- tax rate;

(1-/) - tax shield.

However, interest on borrowed capital is not included in production costs in full. In accordance with the Regulations on the composition of costs for the production and sale of products (works, services), included in the cost price of products (works, services), and on the procedure for the formation of financial results taken into account when taxing profits, for tax purposes, the cost price of products includes the calculation of interest on loans for production needs (received in rubles) within the discount rate of the Central Bank of the Russian Federation, increased by three points, the amount for paying interest on foreign currency loans from banks in the amount of no more than 15% per annum, for paying interest on budget loans in the amounts established by law, and also on interest for deferred payments (commercial loans).

According to Art. 269 of the Tax Code of the Russian Federation, a significant deviation (by more than 20%) of the interest rate from the average level of interest accrued on similar debt obligations issued in the same quarter on comparable terms is not allowed. If the loan rate is exceeded R the average interest rate prevailing for a given period, R t, more than 20%, only 1.2P is taken into account, and the cost of borrowed capital is calculated using the following formula:

and in the absence of similar debt obligations issued in the same quarter on comparable terms - according to the formula:

Where G- refinancing rate.

Payment of interest on loans received for the acquisition of fixed assets, intangible and non-current assets, as well as on overdue loans, on loans received from legal entities that do not have a license from the Central Bank of the Russian Federation to carry out credit operations, is carried out at the expense of the enterprise’s own funds.

For tax purposes, interest costs paid by the issuer on bonds, the circulation of which is carried out through the organizers of trade in the securities market, are accepted within the limits of the refinancing rate, increased by three points.

Therefore, the price of borrowed funds for an enterprise is, as a rule, less than the level of bank interest under the agreement by the value of the product of the Central Bank rate, increased by three points, by the profit tax rate.

Note that similar rules exist for loans in foreign currency, where the maximum interest rates on the loan are determined by the rates LIBOR, but in our case the real rates do not exceed the rates LIBOR.

The tax rate for a company making a loss is zero. Therefore, for a company that does not pay taxes, the cost of debt does not decrease. If the tax rate in equation (11) is zero, then the net value of the liability is equal to the interest rate.

When determining the price of borrowed capital, only those funds whose attraction is associated with additional costs are included in the calculation. On this basis, it is not recommended to include the amount of accounts payable in borrowed capital. In actual practice, settlements with suppliers in the form of bills of exchange and penalties for late payments and taxes to the budget and extra-budgetary funds represent additional costs for the enterprise in using these funds and thereby increase the fee for raising borrowed funds.

In our case we have:

1) income tax rate (IT) = 24%;
2) average refinancing rate = 10.55%;
3) average interest rate on a loan = 6.02%.

1) NP rate = 20%;
2) average refinancing rate = 10.98%;
3) average interest rate on a loan = 10.53%.

1) NP rate = 20%;
2) average refinancing rate = 8.25%;
3) average interest rate on a loan = 10%.

Thus, in 2008 and 2009, the average interest rate on a loan is lower than the RCB refinancing rate, so all loan interest is included in production costs and is not taxed.

Where G- refinancing rate.

For the effective interest rate we obtain

Thus, kf = 8,26%.

We will use the resulting loan interest rates when accounting for the tax shield.

Depreciation is not a real cash flow. However, depreciation provides a so-called “tax shield”.

The effect of the “depreciation tax shield” is manifested in a decrease in taxable profit.

Depreciation Tax Shield = Accrued Depreciation x Tax Rate.

With the increasing diversification of the company's economic activities, the weighted average cost of capital indicator also acquires new meanings. What can be said about the accuracy of the calculated profitability margin: is the accuracy of the calculation decreasing or increasing?

Weighted Average Cost of Capital (WACC) is an indicator that characterizes the cost of capital in the same way that the bank interest rate characterizes the cost of borrowing a loan. The difference between the WACC and the bank rate is that it does not imply a straight-line payment, but instead requires that the investor's total present income be the same as what a straight-line interest payment at a rate equal to the WACC would provide.

WACC is widely used in investment analysis, its value is used to discount expected returns from investments, calculate the return on investment of projects, in business valuation and other applications.

Discounting future cash flows with a rate equal to WACC characterizes the depreciation of future income from the point of view of a particular investor and taking into account his requirements for the return on invested capital.

Diversification is an attempt to reduce risk by investing in several securities. By diversifying their investments across multiple stocks whose economic cycles are not completely aligned, investors are typically able to reduce fluctuations in returns.

Those. the accuracy of calculating the profitability margin increases.

Firm assets = equity capital (shareholders) + liabilities. Based on the given equation, can we write the following: ROA (return on assets) = ROE (return on equity) + I (interest on bank loan)

This is not possible, because risks need to be taken into account.

Return on assets:

r = rf + b (Rm rf),

r expected return on a financial asset

rf - risk-free interest rate typical for short-term treasury bonds

Rm - expected return of the market index

b - beta coefficient, which shows the volatility of the return of a specific financial asset relative to the volatility of the return of the selected market index

According to this formula, the investor receives a reward (yield) for waiting and for market risk:

rf - reward for waiting,

(Rm rf) - market risk reward

Give a formula that most accurately determines stock returns in the short term

ROA = Net profit / average assets

What comparison methodology can be used for the valuation of intangible assets

Intangible assets include the following assets:

Either having no material and material form, or a material and material form of which is not essential for their use in economic activity;
Capable of generating income;
Purchased with the intention of using it for an extended period of time.

Intangible assets can be divided into four main groups:

1. Intellectual property.

2. Property rights.

3. Organizational expenses.

4. Firm price (Goodwill)

1. Intellectual property. This section includes the following intangible assets:

Objects of industrial property. These objects, according to the Paris Convention for the Protection of Industrial Property, include:
Inventions and utility models that are considered as a technical solution to a problem.
Industrial designs, which mean an artistic and design solution for a product that meets established requirements and determines its appearance.
Trademarks, service marks, trade names, names of places of origin of goods or services of another manufacturer, to distinguish goods with special properties.

2. Property rights are the second group of intangible assets. Confirmation of such rights of the enterprise for third-party users of information is a license.

3. Costs, presented in the form of organizational expenses that can be incurred at the time of establishment of the enterprise.

4. The price of a company refers to the value of its business reputation (goodwill). Goodwill is defined as the amount by which the value of a business exceeds the market value of its tangible assets and intangible assets, which is reflected in the financial statements.

The methodology for valuing intangible assets using royalties requires knowledge of the entire life cycle of an object, which can be almost impossible to actually predict. Moreover, it is usually impossible to reliably calculate the amount of profit for the entire life cycle of intangible assets due to the fact that, as a rule, it is not possible to justify the expected obsolescence of intangible assets. Therefore, the use of royalties to calculate the value of intangible assets appears to be ineffective.
It seems more correct to calculate the value of intangible assets using the mass of profits for a certain foreseeable period (only a few years). But it would be more reasonable to divide the profit received from the sale of these intangible assets equally between the seller and buyer of the intangible assets within a certain period, the owner of the intangible assets and the manufacturer of the products containing them.

6. What factors are driving the growing discrepancy between accounting and market debt ratios?

The distinctive characteristics of the quantitative calculation methodology are that the accounting indicator of debt is determined on the basis of traditional financial statements, while the corresponding market indicator is calculated taking into account future, forecast estimates.

The WACC indicator begins to shift towards rd. What are the possible reasons for this shift?

The indicator rd is a function of external and internal factors, namely: rd = f (external and internal factors).

Internal factors, first of all, include:

The share of borrowed funds in the company's total liabilities, the so-called financial leverage (leverage), to external factors:

First of all, the prevailing interest rate in the money market.

Tax benefits associated with the process of borrowing funds.

Reasons: increase in the cost of borrowed funds, increase in loans or debt obligations of the company, change in interest rate

Please indicate the correct option. Calculate accounting profit faster

Option A:

a) underestimates the true profitability of new projects

b) overstates the profitability of “old” projects

Option B:

a) overstates the true profitability of new projects

b) underestimates the profitability of “old” projects

Option A

According to forecasts, market conditions will improve. What will happen in this case with the profitability of a bank certificate of deposit (will it tend to increase, decrease, or remain stable)?

A certificate of deposit is a registered security that certifies the amount of the deposit made to the bank and the right of the depositor (certificate holder) to receive, upon expiration of the established period, the deposit amount and the interest stipulated in the certificate.

security, a written certificate from the bank about the deposit of funds, certifying the right of its owner (only a legal entity) to receive the deposit amount and interest on it within a specified period. Certificates of deposit are issued only in rubles, income on them is accrued in the form of interest.
term income securities with a par value in rubles and income in the form of interest.
a certificate of deposit can be pledged, taken into account at a discount rate, and discounted.
a certificate of deposit has greater liquidity than a deposit agreement and can be resold.

It will tend to increase

What risk does beta measure?coefficient?

Beta coefficient (beta factor) is an indicator calculated for a security or a portfolio of securities. It is a measure of market risk, reflecting the variability of the return of a security (portfolio) in relation to the return of the portfolio (market) on average (the average market portfolio).

According to the financial and economic content, the beta coefficient represents

is an elasticity coefficient; it is a measure of the sensitivity of changes in the profitability of a particular asset against the background of changes in the profitability of the market index. In this case, its formula looks like this:

It’s been a long time since I pampered my readers with all sorts of formulas and calculations, although, to my surprise, for quite a long period I have noticed a persistent interest of a certain number of visitors in the COMPUTING side.

Demand creates supply. The topic we will discuss today is weighted average- will be of interest not only to “bespectacled” people and “nerds”...

In addition to answering basic questions like, what is WACC, how to calculate weighted average cost of capital, what are the features of calculating WACC in the presence of a shield, the article provides specific examples of calculating WACC both with and without taking into account the tax shield.

In most cases, you will have to make a choice between several projects, each of which has its own investment indicator.

The answer to this question can have a significant impact both on determining the VOLUME of investment in this particular project, and on the investment in general, if we are talking about SEVERAL projects.

And for this it is important to estimate as accurately as possible the cost of capital or, in other words, the level of profit acceptable to investors...

Depreciation is not a real cash flow. However, depreciation provides a so-called “tax shield”. The effect of the “depreciation tax shield” is manifested in a decrease in taxable profit. Depreciation Tax Shield = Accrued Depreciation x Tax Rate.

With the increasing diversification of the company's economic activities, the weighted average cost of capital indicator also acquires new meanings. What can be said about the accuracy of the calculated profitability margin: is the accuracy of the calculation decreasing or increasing?

Those. the accuracy of calculating the profitability margin increases.

The company's assets = equity (shareholders' equity) + liabilities. Based on the given equation, is it possible to write the following: ROA(return on assets) =ROE(return on equity capital) +I(interest on bank loan)

This is not possible, because risks need to be taken into account.

Return on assets:

r = r f + b (R m - r f),

r - expected return of a financial asset

r f - risk-free interest rate typical for short-term treasury bonds

R m - expected return of the market index

b - beta coefficient, which shows the volatility of the return of a specific financial asset relative to the volatility of the return of the selected market index

According to this formula, the investor receives a reward (yield) for waiting and for market risk:

r f - reward for waiting,

(R m - r f) - market risk reward

Give a formula that most accurately determines stock returns in the short term

What comparison methodology can be used for the valuation of intangible assets

Intangible assets include the following assets:

Either they do not have a material form, or a material form, which is not essential for their use in economic activity;
Capable of generating income;
Purchased with the intention of using it for an extended period of time.

Intangible assets can be divided into four main groups:

1. Intellectual property.

2. Property rights.

3. Organizational expenses.

4. Firm price (Goodwill)

1. Intellectual property. This section includes the following intangible assets:

Objects of industrial property. These objects, according to the Paris Convention for the Protection of Industrial Property, include:
Inventions and utility models that are considered as a technical solution to a problem.
Industrial designs, which are understood as an artistic and design solution of a product that meets established requirements and determines its appearance.
Trademarks, service marks, trade names, names of places of origin of goods or services of another manufacturer, to distinguish goods with special properties.

2. Property rights are the second group of intangible assets. Confirmation of such rights of the enterprise for third-party users of information is a license.

3. Costs, presented in the form of organizational expenses that can be incurred at the time of establishment of the enterprise.

6. What factors are driving the growing discrepancy between accounting and market debt ratios?

IndicatorWACCstarts to move to the siderd. What are the possible reasons for this shift?

The indicator r d is a function of external and internal factors, namely: r d = f (external and internal factors).

Internal factors, first of all, include:

The share of borrowed funds in the company's total liabilities, the so-called financial leverage (leverage), to external factors:

First of all, the prevailing interest rate in the money market.

Tax benefits associated with the process of borrowing funds.

Reasons: increase in the cost of borrowed funds, increase in loans or debt obligations of the company, change in interest rate

Please indicate the correct option. Calculate accounting profit faster

Option A:

a) underestimates the true profitability of new projects

b) overstates the profitability of “old” projects

Option B:

a) overstates the true profitability of new projects

b) underestimates the profitability of “old” projects

Option A

According to forecasts, market conditions will improve. What will happen in this case with the profitability of a bank certificate of deposit (will it tend to increase, decrease, or remain stable)?

Types:

security, a written certificate from the bank about the deposit of funds, certifying the right of its owner (only a legal entity) to receive the deposit amount and interest on it within a specified period. Certificates of deposit are issued only in rubles, income on them is accrued in the form of interest.
term income securities with a par value in rubles and income in the form of interest.
a certificate of deposit can be pledged, taken into account at a discount rate, and discounted.
a certificate of deposit has greater liquidity than a deposit agreement and can be resold.

It will tend to increase

What risk does beta measure?

According to the financial and economic content, the beta coefficient represents

β = (ΔRm/Rm) / (Δre/re)

In addition to this formula, another formula is used for applied financial calculations:

β = COV (Rm, re) / σ 2 Rm

It is with the help of this formula that the specific value is determined

beta coefficient and an adequate “fair” return on the asset is established.

The beta coefficient takes values greater than 1, less than 1, equal to 1:

If β > 1, then a small dynamic company is analyzed.

A graphical illustration for the case β > 1 is as follows (Fig. 1):

Rice. 1: red (1) - dynamics of the corresponding market index; blue color (2) - price dynamics of shares of a small company

Rice. 2: red (1) - dynamics of the corresponding market index; blue color (2) - price dynamics of shares of a large corporation company

If β = 1, then this is a company whose stock return dynamics exactly correspond to the market return dynamics.

A practical calculation of the beta coefficient involves using the retrospective volatility of the return of a financial asset and a market index over the past 5-10 years. Quantitative calculations use time series of relevant data.

The beta coefficient is a relatively stable value - over a relatively long period it remains constant.

During investment analysis, the b - coefficient is used for both bonds and shares of companies - b debt and b shares. Using these coefficients, the corresponding indicator for the entire company is calculated:

B firm = b debt * (1 - Tc) * D / V u + b shares * E / V u

V u is the market value of the company in the absence of debt,

D - market value of debt,

E - market value of share capital,

Tc - corporate tax rate

Profitability of the company's investment project -IRRabove the indicatorWACC, but less than the market return at the corresponding risk value. How will this fact be reflected in the dynamics of the ratio MVAndB.V.?.

BV/MV - decreases

The price dynamics of a stock rather reflect the economic situation: a) in the past, b) in the future, c) at the current moment

c) at the moment

13. The company received a patent for a promising market product development. How will this affect the company's tax shield? Show possible changes on a graph

By acquiring new material assets, the company acquires a “tax shield”. By liquidating old, but not yet fully depreciated assets, the company loses the “tax shield” it had. Those. upon receipt of a patent, the company acquires a “tax shield” (Fig. 3).

14. What are the main financial indicators compared during the management of assets and liabilities in the short term?

ROIC (Return On Invested Capital) - return on invested capital, which is calculated as follows:

ROA = Net profit / average assets

WACC (Weighted Average Cost of Capital) - weighted average cost of capital, “cost of attracted liabilities” (This calculation indicator can also be considered as the marginal return on capital used)

WACC = (1-Tc) * rd * D/(D+E) + re * E/(D+E)

Rd - cost of borrowed funds (this can be loans or debt obligations of the company)

Re - return on equity capital

D - amount of debt,

Write possible formulas for calculating the economic value of a company in the short run

The basic calculation formula for the value of a company in the short term involves comparing the return on assets and the cost of liabilities:

EV = Invested Capital + PV of projected Economic Profit

Economic Profit = Invested Capital * (ROIC - WACC)

ROIC (Return On Invested Capital) - return on invested capital,

which is calculated as follows:

ROIC = Profit / Invested Capital = Profit / Balance sheet currency - short-term borrowings

Along with the ROIC indicator, it is often necessary to calculate the return on assets indicator: ROA and return on total investments

ROA = Net profit / average assets

Return on total investment = (Net profit + debt capital costs) / total capital

Estimates of net profit and asset value are based on accounting figures.

WACC = (1-Tc) * r d * D/(D+E) + r d * E/(D+E)

R d - cost of borrowed funds (this can be loans or debt obligations of the company)

R e - return on equity capital

D - amount of debt,

E - the amount of equity capital

D/(D+E) - share of borrowings in total liabilities

E/(D+E) - share of equity (shareholder) capital in the total volume of liabilities

Tc - corporate profit tax rate

The above formula for calculating the cost of capital takes on a more complex expression when considering the shares of existing preferred shares that have their own profitability indicators.

WACC = (1-Tc) * r d * D/(D+E+ PS) + r e * E/(D+E + PS) + r ps * PS/(D+E+PS),

r ps is the yield on preferred shares,

PS - share of preferred shares in the company's liabilities

In practice, serious difficulties often arise with the accurate calculation of the shares of debt and equity capital. In some cases, they are guided by financial reporting data, in others - by economic assessments of the calculated values.

In the short term, the main focus is on maintaining the differential, i.e. difference value (ROIC - WACC).

Increasing the difference (ROIC - WACC) can be achieved by the following options:

1) increase the return on invested capital - increase the ROIC indicator.

2) reduce the weighted average cost of capital - lower the WACC indicator

When analyzing the cost of capital, it is traditionally divided into the risk-free rate and the risk premium.

The risk premium compensates for the additional risks (as reflected in the volatility measure) taken on by shareholders. In particular, the calculation formula for the cost of capital can be presented as follows:

WACC = (1-Tc) * r f * B/(B+S) + r e * S/(B+S)

R f - risk-free rate, rate of return on government securities

r e - expected return on company shares

B - market (or economic) value of debt obligations

companies,

S - market value of share capital

16. Interest rates are expected to decline in the market. In this case, which asset is more suitable for investment: bonds or stocks?

Falling interest rates - this is the best time to make investments of almost any type. During such periods, both stocks and bonds provide remarkable returns.