Great question! Not necessarily. There are two versions of this equation, one in which the (1-t) expression appears and the other (that I am using) in which it does not. BOTH can be used when taxes are not equal to zero, but which one should you use depends on whether one is assuming that the firm will maintain a constant debt ratio or not. Specifically, when the firm is expected to maintain a constant debt ratio, you DON'T need (1-t) in this formula (EVEN IF taxes are not equal to zero). On the other hand, if the firm is expecting to maintain speific debt LEVELS (i.e. not targeting a specific debt ratio), then you use the formula with (1-t) in it. There are mathematic reasons for this, and it has to do with the riskiness of interest tax shields in the two cases. That discussion is beyong the scope of this video, but I'll talk about it in a separate one! Hope this helps.
@@professorikram Hi! Have you uploaded the video where you discuss why you shouldn’t consider taxes when you assume a constant debt ratio? Or could you give me more details? It would be very helpful. Thank you very much.
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this was exactly what I was looking for. thanks!
wait, when unlevering equity beta, do we need to consider the tax rate?
Great question! Not necessarily. There are two versions of this equation, one in which the (1-t) expression appears and the other (that I am using) in which it does not. BOTH can be used when taxes are not equal to zero, but which one should you use depends on whether one is assuming that the firm will maintain a constant debt ratio or not.
Specifically, when the firm is expected to maintain a constant debt ratio, you DON'T need (1-t) in this formula (EVEN IF taxes are not equal to zero). On the other hand, if the firm is expecting to maintain speific debt LEVELS (i.e. not targeting a specific debt ratio), then you use the formula with (1-t) in it.
There are mathematic reasons for this, and it has to do with the riskiness of interest tax shields in the two cases. That discussion is beyong the scope of this video, but I'll talk about it in a separate one! Hope this helps.
@@professorikram Hi! Have you uploaded the video where you discuss why you shouldn’t consider taxes when you assume a constant debt ratio? Or could you give me more details? It would be very helpful. Thank you very much.
Yes, recently. Please search for “Relationship between unlevered and levered beta | Part 3 of 3: With Debt and Corporate Taxes”