Marginal Tax Rate
The tax rate a company would pay on its NEXT dollar of taxable income, distinct from the effective tax rate (which is total tax / pre-tax income on already-realized income). The marginal rate is the right input for WACC in a forward DCF because the tax shield on incremental debt is computed at the marginal rate. The effective tax rate often differs from the marginal rate due to one-time credits, R&D credits, foreign-tax credits, or jurisdiction-specific permanent differences -- relying on effective rate flatters after-tax cost of debt and understates WACC.
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Related terms
Ambiguity Aversion · Anchored Assumption · Asset Beta · Bank ROE Spread · Banker Pitch Deck · Beta
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