Deferred tax account - TDA

CFA Level III Portfolio Management
#1

Dear all,

I have a question on the FVIF of deferred tax, basically there are two equations as mentioned below:

  1. {(1+r)^n x (1-tax on capital gain)} + tax on capital gain x cost basis

  2. {(1+r)^n x (1-tax on capital gain)}

I’m confused when to use the first and when to use the second equation, can someone help me on this please.

#2

You would only use equation 2 if the cost basis is 0, as there is nothing to add back. The purpose of the second term in equation 1 (tax rate * cost basis) is to add back the tax deducted from the cost basis in the first part of the equation.

1 Like
#3

Thank you, great explanation