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Hi, I came up with another question: what discount rate shall we use when we discount the additional tax payable in the mother company? I learned from BPP revision kits and found contradictory practices; some use headquarter wacc, some use subsidiary investment cost of capital. Can you help to clarify? Thanks
You should use the same discount rate as used for the other cash flows of the subsidiary.
The reason is that the required return from the subsidiary (and therefore the discount rate) depends on the risk of the subsidiary.
Since the extra tax due because of the subsidiary is at a fixed tax rate, it has the same risk as the subsidiaries cash flows and should therefore be discounted at the same discount rate.
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