Module II· WACC & Capital StructureIntermediate
Question
Should you use the marginal or the effective tax rate in WACC?
Answer
Mechanics
Marginal — i.e. "what tax applies to each additional dollar earned?" In most jurisdictions the marginal corporate rate is roughly 25–30%.
Marginal vs. effective
The effective tax rate from the annual report is often lower because of NOLs, tax planning, and international subsidiaries — but that reflects past conditions. In the DCF you need a forward-looking assumption.
In practice
If the effective rate today is 22% (NOLs) but the long-run marginal rate is 30%, you compute WACC with 30%. In the FCF use 22% short-term, then step up to 30%.
Deep diveShow more details
Pitch tip
A tax-rate mismatch between FCF and WACC is a classic junior mistake.