RAROC Tax rate

mbbx5va2

Member
Subscriber
Hi

In some sources i am finding that we multiply the numerator (Revenue +ROCE - EL - Int - Op) by the tax rate as it is whereas other sources it says I need to multiply numerator by (1-Tax rate) why is this?

Thanks
 

gsarm1987

Member
Subscriber
@mbbx5va2 , tax is an expense so that is why needs to be subtracted from the numerator. Note, the tax to be used is the effective tax rate. this is the one that's applied to profit before tax. when you multiply tax rate with the values in numerator, you are finding the effective tax.
(Revenue +ROCE - EL - Int - Op - effective tax). sometimes its easier to apply the (1-t) direct to the expression (Revenue +ROCE - EL - Int - Op), however, not all expenses are tax deductible, for that reason its always advisable to calculate the tax and write the numerator as: (Revenue +ROCE - EL - Int - Op - effective tax). reduces chances of errors too.
 
Top