medium · Investment Banking

In a steady-state terminal year, why should the UFCF calculation typically adjust taxes based on the marginal tax rate rather than the current effective tax rate?

1. To increase the Enterprise Value by lowering the tax burden.
2. Because GAAP requires the use of marginal rates for all DCF calculations.
3. Because the marginal tax rate includes the interest tax shield.
4. To remove the impact of temporary tax credits or one-time items that are not sustainable into perpetuity.

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