Expectations Investing

Since accelerated depreciation is greater than straight-line depreciation,

it increases a company’s expenses and reduces its cash tax bill. As a

result, cash tax rates are typically lower than book tax rates.

4

Table 2-1

shows average cash tax rates for various industries for the 1997–1999

period.[[AR 2-1]]

The cash tax rate represents taxes payable on operating profit, not

on pretax income. Therefore, to calculate the taxes that a company

would pay if it were entirely equity financed, we must remove the tax

effects of interest expense and nonoperating income (or expenses). The

tax benefit of interest expense deductions (interest expense multiplied

by the ...