Method of indirect taxation whereby a tax is levied at each stage of production on the value

# Related Terms:

## NPV (net present value of cash flows)

Same as PV, but usually includes a subtraction for an initial cash outlay.

## PV (present value of cash flows)

the value in today’s dollars of cash flows that occur in different time periods.
present value factor equal to the formula 1/(1 - r)n, where n is the number of years from the valuation date to the cash flow and r is the discount rate.
For business valuation, n should usually be midyear, i.e., n = 0.5, 1.5, . . .

The net present value analysis of an asset if financed solely by equity
(present value of un-levered cash flows), plus the present value of any financing decisions (levered cash
flows). In other words, the various tax shields provided by the deductibility of interest and the benefits of
other investment tax credits are calculated separately. This analysis is often used for highly leveraged
transactions such as a leverage buy-out.

## After-tax profit margin

The ratio of net income to net sales.

## After-tax real rate of return

Money after-tax rate of return minus the inflation rate.

## Asymmetric taxes

A situation wherein participants in a transaction have different net tax rates.

## Average tax rate

taxes as a fraction of income; total taxes divided by total taxable income.

## Before-tax profit margin

The ratio of net income before taxes to net sales.

## Bond value

With respect to convertible bonds, the value the security would have if it were not convertible
apart from the conversion option.

## Book value

A company's book value is its total assets minus intangible assets and liabilities, such as debt. A
company's book value might be more or less than its market value.

## Book value per share

The ratio of stockholder equity to the average number of common shares. Book value
per share should not be thought of as an indicator of economic worth, since it reflects accounting valuation
(and not necessarily market valuation).

## Break-even tax rate

The tax rate at which a party to a prospective transaction is indifferent between entering
into and not entering into the transaction.

Book value.

## Cash flow after interest and taxes

Net income plus depreciation.

## Cash-surrender value

An amount the insurance company will pay if the policyholder ends a whole life
insurance policy.

## Conversion value

Also called parity value, the value of a convertible security if it is converted immediately.

## Corporate tax view

The argument that double (corporate and individual) taxation of equity returns makes
debt a cheaper financing method.

## Corporate taxable equivalent

Rate of return required on a par bond to produce the same after-tax yield to
maturity that the premium or discount bond quoted would.

## Deferred taxes

A non-cash expense that provides a source of free cash flow. Amount allocated during the
period to cover tax liabilities that have not yet been paid.

## Depreciation tax shield

The value of the tax write-off on depreciation of plant and equipment.

## Double-tax agreement

Agreement between two countries that taxes paid abroad can be offset against
domestic taxes levied on foreign dividends.

## Earnings before interest and taxes (EBIT)

A financial measure defined as revenues less cost of goods sold
and selling, general, and administrative expenses. In other words, operating and non-operating profit before
the deduction of interest and income taxes.

## Equivalent taxable yield

The yield that must be offered on a taxable bond issue to give the same after-tax
yield as a tax-exempt issue.

## Exercise value

The amount of advantage over a current market transaction provided by an in-the-money
option.

## Expected value

The weighted average of a probability distribution.

## Expected value of perfect information

The expected value if the future uncertain outcomes could be known
minus the expected value with no additional information.

## Extraordinary positive value

A positive net present value.

See: Par value.

## Firm's net value of debt

Total firm value minus total firm debt.

## Foreign tax credit

Home country credit against domestic income tax for foreign taxes paid on foreign
derived earnings.

## Future value

The amount of cash at a specified date in the future that is equivalent in value to a specified
sum today.

## Imputation tax system

Arrangement by which investors who receive a dividend also receive a tax credit for
corporate taxes that the firm has paid.

## Interest equalization tax

tax on foreign investment by residents of the U.S. which was abolished in 1974.

## Interest tax shield

The reduction in income taxes that results from the tax-deductibility of interest payments.

## Intrinsic value of an option

The amount by which an option is in-the-money. An option which is not in-themoney
has no intrinsic value. Related: in-the-money.

## Intrinsic value of a firm

The present value of a firm's expected future net cash flows discounted by the
required rate of return.

## Investment tax credit

Proportion of new capital investment that can be used to reduce a company's tax bill
(abolished in 1986).

## Investment value

Related:straight value.

## Limited-tax general obligation bond

A general obligation bond that is limited as to revenue sources.

## Liquidation value

Net amount that could be realized by selling the assets of a firm after paying the debt.

## Loan value

The amount a policyholder may borrow against a whole life insurance policy at the interest rate
specified in the policy.

## Marginal tax rate

The tax rate that would have to be paid on any additional dollars of taxable income earned.

## Market value

1) The price at which a security is trading and could presumably be purchased or sold.
2) The value investors believe a firm is worth; calculated by multiplying the number of shares outstanding by the
current market price of a firm's shares.

## Market value ratios

Ratios that relate the market price of the firm's common stock to selected financial
statement items.

## Market value-weighted index

An index of a group of securities computed by calculating a weighted average
of the returns on each security in the index, with the weights proportional to outstanding market value.

## Maturity value

Related: par value.

The adjusted present value minus the initial cost of an investment.

## Net asset value (NAV)

The value of a fund's investments. For a mutual fund, the net asset value per share
usually represents the fund's market price, subject to a possible sales or redemption charge. For a closed end
fund, the market price may vary significantly from the net asset value.

## Net book value

The current book value of an asset or liability; that is, its original book value net of any

## Net present value (NPV)

The present value of the expected future cash flows minus the cost.

## Net present value of growth opportunities

A model valuing a firm in which net present value of new
investment opportunities is explicitly examined.

## Net present value of future investments

The present value of the total sum of NPVs expected to result from
all of the firm's future investments.

## Net present value rule

An investment is worth making if it has a positive NPV. Projects with negative NPVs
should be rejected.

## Net salvage value

The after-tax net cash flow for terminating the project.

## Original face value

The principal amount of the mortgage as of its issue date.

## Par value

Also called the maturity value or face value, the amount that the issuer agrees to pay at the maturity date.

## Parity value

Related:conversion value

## Personal tax view (of capital structure)

The argument that the difference in personal tax rates between
income from debt and income from equity eliminates the disadvantage from the double taxation (corporate
and personal) of income from equity.

## Present value

The amount of cash today that is equivalent in value to a payment, or to a stream of payments,
to be received in the future.

## Present value factor

Factor used to calculate an estimate of the present value of an amount to be received in
a future period.

## Present value of growth opportunities (NPV)

Net present value of investments the firm is expected to make
in the future.

## Price value of a basis point (PVBP)

Also called the dollar value of a basis point, a measure of the change in
the price of the bond if the required yield changes by one basis point.

## Progressive tax system

A tax system wherein the average tax rate increases for some increases in income but
never decreases with an increase in income.

## Relative value

The attractiveness measured in terms of risk, liquidity, and return of one instrument relative to
another, or for a given instrument, of one maturity relative to another.

## Replacement value

Current cost of replacing the firm's assets.

## Residual value

Usually refers to the value of a lessor's property at the time the lease expires.

## Salvage value

Scrap value of plant and equipment.

## Short-term tax exempts

Short-term securities issued by states, municipalities, local housing agencies, and
urban renewal agencies.

## Split-rate tax system

A tax system that taxes retained earnings at a higher rate than earnings that are
distributed as dividends.

## Standardized value

Also called the normal deviate, the distance of one data point from the mean, divided by
the standard deviation of the distribution.

## Straight value

Also called investment value, the value of a convertible security without the con-version option.

## TANs (tax anticipation notes)

tax anticipation notes issued by states or municipalities to finance current
operations in anticipation of future tax receipts.

## Tax anticipation bills (TABs)

Special bills that the Treasury occasionally issues that mature on corporate
quarterly income tax dates and can be used at face value by corporations to pay their tax liabilities.

## Tax books

Set of books kept by a firm's management for the IRS that follows IRS rules. The stockholder's
books follow Financial Accounting Standards Board rules.

## Tax clawback agreement

An agreement to contribute as equity to a project the value of all previously
realized project-related tax benefits not already clawed back to the extent required to cover any cash
deficiency of the project.

## Tax differential view ( of dividend policy)

The view that shareholders prefer capital gains over dividends,
and hence low payout ratios, because capital gains are effectively taxed at lower rates than dividends.

## Tax-exempt sector

The municipal bond market where state and local governments raise funds. Bonds issued
in this sector are exempt from federal income taxes.

## Tax free acquisition

A merger or consolidation in which 1) the acquirer's tax basis in each asset whose
ownership is transferred in the transaction is generally the same as the acquiree's, and 2) each seller who
receives only stock does not have to pay any tax on the gain he realizes until the shares are sold.

## Tax haven

A nation with a moderate level of taxation and/or liberal tax incentives for undertaking specific
activities such as exporting or investing.

## Tax Reform Act of 1986

A 1986 law involving a major overhaul of the U.S. tax code.

## Tax shield

The reduction in income taxes that results from taking an allowable deduction from taxable income.

## Tax swap

Swapping two similar bonds to receive a tax benefit.

## Tax deferral option

The feature of the U.S. Internal Revenue Code that the capital gains tax on an asset is
payable only when the gain is realized by selling the asset.

## Tax-deferred retirement plans

Employer-sponsored and other plans that allow contributions and earnings to
be made and accumulate tax-free until they are paid out as benefits.

## Tax-timing option

The option to sell an asset and claim a loss for tax purposes or not to sell the asset and
defer the capital gains tax.

## Taxable acquisition

A merger or consolidation that is not a tax-fee acquisition. The selling shareholders are
treated as having sold their shares.

## Taxable income

Gross income less a set of deductions.

## Taxable transaction

Any transaction that is not tax-free to the parties involved, such as a taxable acquisition.

## Terminal value

The value of a bond at maturity, typically its par value, or the value of an asset (or an entire
firm) on some specified future valuation date.

## Time value of an option

The portion of an option's premium that is based on the amount of time remaining
until the expiration date of the option contract, and that the underlying components that determine the value of
the option may change during that time. Time value is generally equal to the difference between the premium
and the intrinsic value. Related: in-the-money.

## Time value of money

The idea that a dollar today is worth more than a dollar in the future, because the dollar
received today can earn interest up until the time the future dollar is received.

## Two-tier tax system

A method of taxation in which the income going to shareholders is taxed twice.

## Utility value

The welfare a given investor assigns to an investment with a particular return and risk.

## Value-at-Risk model (VAR)

Procedure for estimating the probability of portfolio losses exceeding some
specified proportion based on a statistical analysis of historical market price trends, correlations, and volatilities.

Prevails when the value of a whole group of assets exactly equals the sum of the
values of the individual assets that make up the group of assets. Stated differently, the principle that the net
present value of a set of independent projects is just the sum of the net present values of the individual projects.

## Value date

In the market for Eurodollar deposits and foreign exchange, value date refers to the delivery date
of funds traded. Normally it is on spot transactions two days after a transaction is agreed upon and the future
date in the case of a forward foreign exchange trade.

## Value dating

Refers to when value or credit is given for funds transferred between banks.

## Value manager

A manager who seeks to buy stocks that are at a discount to their "fair value" and sell them at
or in excess of that value. Often a value stock is one with a low price to book value ratio.

## Withholding tax

A tax levied by a country of source on income paid, usually on dividends remitted to the
home country of the firm operating in a foreign country. tax levied on dividends paid abroad.