Module II· DCF — Mechanics & FCFIntermediate
Question
What is the difference between cash taxes and book taxes, and which one belongs in UFCF?
Answer
Mechanics
Book taxes (P&L) are the tax expense under IFRS including deferred taxes. Cash taxes are the actual payments to the tax authority. Three sources drive the difference:
- D&A: book and tax depreciation differ (e.g. declining-balance vs. straight-line).
- Loss carryforwards: temporarily reduce cash tax.
- Tax rates: a book rate around 30%, an effective cash rate closer to 25% in practice (varies by jurisdiction).
In UFCF you want the real cash effect, so use cash taxes. Formula: NOPAT × cash tax rate. In the steady state the cash tax rate converges on the book rate, because temporary differences even out.