# Business insight tax rates for ceputi9 not in our

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BUSINESS INSIGHT Tax Rates for C<e.'!,puti!!.9 NO~~T ~ ., In our examples and assignments, we assume the statutory tax rate is 37% as this is the approxi- mate average combined federal and state tax rate for public companies. We can, as an alternative approach, compute a company-specific tax rate using the income tax footnote in the 10-K. For example, Target provides the following table in its 1 O-K for the year ended January 29, 2011 : Federal statutory rate . State income taxes, net of federal tax benefit . Other . 35.0% 1.4 (1.3) 35.0% 2.8 (2.1) 35.0% 3.8 (1.4) 35.7% 37.4% Effective tax rate . 35.1% The federal statutory rate is 35.0%, and Target pays state taxes amounting to an additional 1.4% (it also reports reductions of 1.3% relating to "other" items). Thus, Target's effective tax rate (or aver- age) for all of its income is the sum of all its taxes paid less benefits received, or 35.1 %. However, the tax shield that we add back in computing NOPAT uses only federal and state tax rates. For Tar- get, the company-specific tax rate that we can use to compute the tax shield is 36.4% (35.0% + 1.4%). It would be incorrect to use Target's 35.1 % company-specific effective tax rate to compute NOPAT, as that rate includes both operating and nonoperating items. We discuss income tax more fully in Module 5. revenue greater than nonoperating expense, so-called net nonoperating revenue, the tax on operat- ing profit is computed as: Tax expense - [Pretax net nonoperating revenue X Statutory tax rate]). Applying this method, we see that Target had a tax shield of \$280 million (computed as pretax net nonoperating expense of \$757 million times its statutory tax rate of 37%) and tax on operating profit of \$1,855 million (computed as \$1,575 million + \$280 million).' We subtract the I The statutory federal tax rate for corporations is 35% (per U.S. tax code). Also, most states and some local jurisdictions tax corporate income, and those state taxes are deductible for federal tax purposes. The net state tax rate is the statutory rate less the federal tax deduction. The tax rate on operating profit is the sum of the two. On average, the net state tax is about 2%; thus, we use 37% (35% + 2%) as the assumed tax rate on nonoperating expenses and revenues in our examples and assignments at the end of the module. The business insight boxes below explain that the tax rate on pretax profit will usually not be the assumed statutory rate (37%).

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Module 3 I Profitability Analysis and Interpretation 3-8 operating profit from the net operating profit before tax to obtain NOPAT. Thus, Target's rating profit after tax is computed as follows (\$ millions): Net operating profit before tax (NOPSD . Less tax on operating profit Tax expense (from income statement) . Tax shield (\$757 x 37%) . Net operating profit after tax (NOPAD . \$1,575 +280 \$5,252 (1,855) \$3,397 ID-MODULE REVIEW 1 Following is the income statement of Walmart. erating Items in the Balance Sheet -NOA Net operating assets = Operating assets - Operating liabilities \$418,952 2,897 421,849 315,287 81,020 25,542 1,928 277 (201) 2,004 23,538 6,703 876 7,579 15,959 1,034 16,993 (604) \$ 16,389 Required Compute Walmart's net operating profit after tax (NOPAT) for its fiscal year 2011. Assume a tatutory rate of 37% applies to nonoperating expenses and revenues.
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