Getting a bit confused here. In the CFAI corp finance book they provide a definition of NOPLAT that involves adding back net int less taxes and adjusting for deferred taxes. Schweser defines NOPLAT in the international section of equity in what seems a totally different way. Did I miss something? If not how are you folks dealing with the difference?
Can you provide the page number and CFAI volume you’re referring to? On page 168 of CFAI vol 4, Equity, NOPLAT = EBITA (or EBIT since there is no amortization) - taxes Schweser defines it the same way on book 3, page 75. It seems as if the formulas match up. In addition, investopedia defines it as EBIT * (1-tax rate), which is essentially the same thing as well.
Thanks for your help on this. CFAI vol 3 page 271 says that NOPLAT = Unlevered net income (EBIT) + change in deferred taxes. The difference between the two is deferred taxes
Ok, did a bit of digging and came up with this answer: the formula in vol 3 of the CFAI text is a bit more granular than the one I mentioned earlier. If you go to page 269, you can try calculating NOPLAT using the EBIT * (1-t) formula and you’ll get 2713. This answer ends up being pretty close to the 2732 number they arrive at. The only difference is that the vol 3 formula takes into account that a company pays less in taxes temporarily due to temporary differences in GAAP and tax accounting. It’s really not suprising that there is an inconsistency. After all, the curriculum is patched together from various sources with variously different authors. As to which formula to use…beats the hell outta me. I’m inclined to use the one in Schweser though…
See these links for more discussion on NOPLAT/NOPAT http://www.anderson.ucla.edu/faculty/dick.rumelt/Docs/Notes/num_101-restruct_fin_state.pdf http://en.wikipedia.org/wiki/NOPAT
I actually was wondering about this…
EBIT (1-t) taxes interest, but you would generally remove interest before taxing EBT. What am I missing here?
EBIT = Operating profit. So multiplying by (1-t) gives you an idea of operating profit after tax before taking into consideration financial leverage. Thus, why interest is still in there. Two firms with the same EBIT but with different leverage will have different Net Income amounts. One of the knocks against EBIT is that it’s before tax, not after. NOPLAT adjusts that.
To calculate NI we deduct interest and than tax it but NOPLAT can be used in multiple other ways. Like el duque discussed one use. Economic Value Added is also calculated using NOPLAT & $WACC to check what value has the management added to the firm in an accounting period, mostly a year. In WACC the after tax cost of debt is used and NOPLAT is also after tax, they both are kind of standardized then.
Neither of you really addressed the main question though. If you take EBIT and multiply by the tax rate, you are effectively taxing interest.
Let’s say that your EBIT=100, tax rate is 40%, and interest expense is 20. NOPLAT or EBIT (1-t) is 60, and then we deduct interest expense to get to NI of 40.
However, if we do what is usually done and deduct interest beforehand, we get EBT of 80 and then tax EBT at 40% to get NI of 48.
How is NOPLAT an adequate method given that it overstates taxes?
Err…what was the main question?
Oh I see…
I think the point is, you wouldn’t go through your first calculation to begin with. There is no reason to get Net Income by the method you describe.
NOPLAT is a way to say “What is my operating profit when I take into account taxes?”.
Not, “What would Net Income be if I used NOPLAT instead of EBIT?”.
That’s really all it’s answering. In terms of being adequate…it depends on the function. In terms of cash flows, it’s not all that good because Depreciation and other Non Cash charges are not included.
However, in terms of comparing it to EBIT, then the after tax effect is supposed to make it more relevant.
*shrug* I’m just explaining it how I understood it. I personally never saw NOPLAT in any of my accounting or finance classes before taking these exams.
Does the LOS then expect us to calculate… given the mess it is??
I would think so. It comes up again in reading 42 for EVA. it’s really not a difficult formula to remember if you’re using EBIT * (1-t).