Assumptions Part 2
Financial modelling and valuation
– Deferred tax
I trust you’ve already reviewed the P&L and Balance Sheet in a way that makes it convenient to use it in our model. With that taken care of, let’s proceed from where we left off before.
The last chapter was an exercise in calculating the deferred tax’s growth rate from Y2 to Y5 and showing its average from Y6 to Y10, but this leads to volatile figures. I suggest we consider a more advantageous solution.
Comprehending deferred tax reveals the connection between it and depreciation since the latter is treated in a particular way. Therefore, deferred tax and depreciation are linked.
Rather than looking at the growth rate of deferred taxes, it would be wise to think about how much deferred tax equates to in terms of depreciation.
In Year 2, the deferred tax amount is 16.95Cr, and the depreciation is 121.73 Cr. Therefore, the deferred tax expressed as a percentage of depreciation for Year 2 is –
16.95/121.73
= 13.92%
We can keep this going across Y3, Y4, and Y5 in Excel.
As can be seen, the figures are much more stable. I urge you to adapt your model accordingly. As for projections, you should take the rolling average. Y6’s rolling average should comprise of Y2-Y5; for Y7 it’s Y3-Y6 and so on.
The resulting figure is quite constant.
Before you moan and groan at me for making you retake the postponed taxes part, I’d like to inform you that the growth rate approach for presumptions is essential, and it will be employed in the next chapter when we discuss P&L assumptions.
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