Pre and Post-Tax Discount Rates

Lonergan (2009) expounded that a proper valuation of equity or business cash flows should use post-tax cash flows discounted at a suitable post-tax discount rate. The use of pre-tax cash flows discounted at a pre-tax discount rate is not only fraught with difficulty, it is in some instances erroneous. This article examines the argument by Lonergan, and subsequent discussions by Jindra & Voetmann (2010) and Davis (2010). It concludes that discounting post-tax cash flows at post-tax discount rates is a sensible valuation approach for these assets, as it can be appropriately calibrated, whereas pre-tax discount rates cannot