medium · Investment Banking valuation-core

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 through a marginal-rate assumption.
2. Because GAAP formally requires marginal-rate tax accounting to be used for every DCF valuation model.
3. Because the marginal tax rate already fully embeds the value of the interest tax shield within its stated tax rate.
4. To remove the impact of temporary tax credits or one-time items that are not sustainable into perpetuity.

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