How do you know whether to include (1-tax rate) in the un-levering and re-leviering of beta? I have noticed sometimes it is included and other times, it is not.
It was included at Level I, but not at Level II.
(Technically, it is in the Level II curriculum: in a footnote. Ignore it.)
Alright thank you. So we should be good with just having (1+(D/E)) in the denominator?
Out of curiosity, do you know why they use that formula for L2? I’ve only ever used the tax-effected approach which seems like standard market convention.
Apparently, both formulas are correct: using (1-T) or not. It depends on the case analysis. Can’t quote right now from theory how to differentiate the cases. Sorry for that.
In my opinion, when the company faces taxes, we should use the marginal tax rate.
When the company is exempt of taxes (like trusts and other vehicles), we should not include the tax.