# Equity: Reading 38 Emerging Market Valuation EOC #3

CFAI Equity page 191 CFAI has calculated NOPLAT based on the given Nominal forecast for tax: Real NOPLAT = real EBITDA - Dep - Tax real EBITDA = 813,126 Dep = 214,286 Real Tax = 238,000 (given) / 1.10 (based on 10% inflation) So, real NOPLAT = 813,126 - 214,286 - 216,364 = 382,476 I understand how they did this and makes sense to me. However, we can also calculate Real NOPLAT using real EBITDA, Dep AND a given statutory tax rate (all of this information is available in the problem set): real EBITDA = 813,126 (same as above) Dep = 214,286 (same as above) Real Tax = (813,126 - 214,286) * 35% = 209,594 Real NOPLAT = 813,126 - 214,286 - 209,594 = 389,246 Can someone please explain what is wrong in doing this the second way?

Given 35% tax is nominal tax rate. You can’t use it on real terms.

This triggered me another question. Obviously, the real tax rate has to be <35%. If that is the case, the tax amount still goes down. I am wondering what real tax rate will bring 216,364?

Well, the tax amount includes tax shields for other items such as Interests and other operating items etc,. So they must give you either the real tax amount to you or the other items and a mechanism to go from nominal to real to arrive at real tax amount…,02

How do we know that this is nominal?

I thought the published tax rates on Exhibit 2 are statutory (tax authority imposed) real rates as opposed to effective nominal rates…?

tax is always real…there is no nominal to it. However, the other components in EBITDA are subjective valuation measures. So tax% on real IDA (in EBITDA) are real taxes.

Tax is always nominal isnt it.

Can anyone help us out with this? Just got stuck on this problem (page 189-192 in CFAI Equity Book)

Summarizing the questions:

1. Where is CFAI getting 238,000 as the Income Tax? (what am I missing?? See it in "Nominal Forecast but am lost why you don’t just use their 35% tax rate forecast in Exhibit 2)

2. What is the FINAL verdict is Tax always Nominal or real??

Thanks guys

Good post.

Refer to page 166 of CFAI, " Specifically, when projecting in real terms, it is often difficult to calculate taxes correctly, as taxes are often calculated based on nominal financial statments." then below in exhibit 2 it shows that income taxes are preferred to be used from nominal statements. So when possible adjust nominal Taxes to real, do not multiply Real EBIT by tax rate.

Good post.

Refer to page 166 of CFAI, " Specifically, when projecting in real terms, it is often difficult to calculate taxes correctly, as taxes are often calculated based on nominal financial statments." then below in exhibit 2 it shows that income taxes are preferred to be used from nominal statements. So when possible adjust nominal Taxes to real, do not multiply Real EBIT by tax rate.