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US Corporate taxes on the table in cliff talks


onyx1
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http://professional.wsj.com/article/SB10001424127887323339704578173241968322374.html?mod=WSJPRO_hpp_LEFTTopStories

 

 

Given that lower US corporate tax rates have been supported by both parties (Dems have suggested lowering rates to 28% from 35%, and Repubs have offered 25%) it is plausible that we will see some agreement on this topic. If it happens, corporations with large deferrals will be required to adjust the value of their deferrals and this will have a direct effect on BV.  Those with large DTLs will show an increase in BV, and those with large NOLs/DTA will show a decrease in BV.  Who will show significant changes?  Two come to mind,  AIG and BRK.  I have made some simplifying assumptions to get an idea of the maximum exposure for each.  For a drop to 25% from 35% rate:

 

AIG will be a loser.  AIG had a BV of $114.3bln and a net DTA of $16.6bln as of YE 2011.  DTA could fall to a value as much as 25/35 * 16.6 = $11.85bln or drop of 4% of BV.

 

BRK will be a winner.  BRK had a BV of $169.0bln and a DTL of $37.1bln (lots of unrealized gains from securities) as of YE 2011.  The DTL could fall in value as much as 25/35 * 37.1 = $26.5bln, or rise in BV of 6%.

 

Keep in mind these are maximums and likely to by less as some the deferrals are linked to international operations (especially with AIG).  With BRK though, the increase in BV could have a meaningful impact on the market price because of the Buffett put of 110%.

 

 

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http://professional.wsj.com/article/SB10001424127887323339704578173241968322374.html?mod=WSJPRO_hpp_LEFTTopStories

 

 

Given that lower US corporate tax rates have been supported by both parties (Dems have suggested lowering rates to 28% from 35%, and Repubs have offered 25%) it is plausible that we will see some agreement on this topic. If it happens, corporations with large deferrals will be required to adjust the value of their deferrals and this will have a direct effect on BV.  Those with large DTLs will show an increase in BV, and those with large NOLs/DTA will show a decrease in BV.  Who will show significant changes?  Two come to mind,  AIG and BRK.  I have made some simplifying assumptions to get an idea of the maximum exposure for each.  For a drop to 25% from 35% rate:

 

AIG will be a loser.  AIG had a BV of $114.3bln and a net DTA of $16.6bln as of YE 2011.  DTA could fall to a value as much as 25/35 * 16.6 = $11.85bln or drop of 4% of BV.

 

BRK will be a winner.  BRK had a BV of $169.0bln and a DTL of $37.1bln (lots of unrealized gains from securities) as of YE 2011.  The DTL could fall in value as much as 25/35 * 37.1 = $26.5bln, or rise in BV of 6%.

 

Keep in mind these are maximums and likely to by less as some the deferrals are linked to international operations (especially with AIG).  With BRK though, the increase in BV could have a meaningful impact on the market price because of the Buffett put of 110%.

 

Thank you, Wayne for pointing this out.  :)

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